At the risk of repeating myself, why is this a good deal for shareholders?
And do you really expect DIRECTV to convert even half of the existing Primestar subs? For them to do so, they must overcome these challenges:
- limitation of boxes to divert from retail to conversion. DIRECTV can't afford take its product off of the shelves during the conversion process.
- limitation of installation capacity.
- competition from DISH Network's Primestar conversion offer. Remember, Primestar subs are month-to-month subscribers. There is no obligation for them to convert. And, without the $700-800 per sub payment DIRECTV must make to Primestar, DISH could make an offer that DIRECTV could not afford to match (ie. 1 FREE year of programming plus free hardware).
Therefore, doing the math:
$750 (midrange number) x 2.3m subs x 50% conversion rate = $862,500,000
Add $500,000,000 (payment for satellite assets) = $1,362,500,000
Less $1,150,000,000 debt due bondholders = $212,500,000 total valuation.
TSATA shares are 37% of total ownership, so they are worth $78,625,000. With 67.75 million shares outstanding, that's $1.16 per share.
That's right. $1.16 per share. Not $3.50 to 4.50.
Worst of all, the revenue won't all come in right away, meaning that the current portion of long term debt will continue to eat away at the company's cash position as the asset sale revenue trickles in. If you are DIRECTV, you are currently adding about 150,000 subs per month from retail distribution. You don't want to lose these subs, since they cost less to acquire. The most that you can convert is probably an additional 150,000 subs per month before you overload your infrastructure. Given the shortage of additional installation capacity, 100,000 per month is probably a more realistic conversion estimate. To convert 50% of existing Primestar subs at those rates it will take 7.6 to 11.5 months.
And that doesn't even take into account the delay between when the deal is announced and when it receives regulatory approval. Or who bears the costs of providing service on the existing Primestar platform during the conversion. Is Primestar going to go dark now? Or a year from now?
In short, this stock should be trading at a slight discount to this deal, or about $7/8. When people stop buying on rumor and begin selling on news, this stock will make Tee Comm look like a smart investment.
You heard it here first.
Regards,
NOEL |
