Upped Offer to $1.4b in the Face of Rival Bids

I reported on March 4 that Harbinger Capital and Solus Alternative Asset Management had made a competitive bid for both DBSD and Terrestar, two bankrupt satellite concerns that Dish Network (Nasdaq:DISH) has been maneuvering to acquire.  In the story I suggested that Dish ceo Charles Ergen might walk away from his $1b offer for DBSD, which valued the S-band satellite spectrum at about $0.17/MHz POP.  The rival offers implied a spectrum value of $0.22/MHz POP and I suggested that Ergen’s play was more speculative and that he might not want to participate in a bidding war or pay a higher price…

Got that one wrong!  On March 15 Dish filed an 8-K with the SEC that outlined the details of its new, $1.4b offer for DBSD. And yesterday (March 16) the Bankruptcy Court approved it.  The new price values the spectrum at about $0.24/MHz POP, which is still pretty cheap for spectrum in general, about a third of what 700 MHz spectrum went for in the 2008 auction.  

Under the Revised Investment Agreement, Dish will provide a Credit Facility to provide DBSD North America and its affiliates with a non-revolving, multiple draw term loan in the aggregate principal amount of $87.5m.  Dish will also remain committed to support DBSD North America’s plan of reorganization, under which Dish will acquire 100% of the equity upon DBSD's emergence from bankruptcy.  All claims under DBSD’s 7.5% Convertible Senior Secured Notes of 2009 and The Bank of New York Mellon, as trustee, will be paid in full and all of DBSD’s obligations under the Credit Facility will be paid in full.  Holders of allowed general unsecured claims and of allowed administrative claims will also be paid in full.  Holders of capital stock, including ICO Global Communications, will be paid an aggregate of $290m.

Dish will also pay ICO another $325m; in exchange ICO agreed to support the reorganization plan, it agreed to sell Dish certain rights with respect to DBSD’s G1 satellite, and ICO will also enter into ancillary agreements relating to transitional services, intellectual property rights and spectrum coordination and tax matters.

Now all Ergen has to do is get control of Terrestar and he will have 46 MHz of spectrum with which to start a mobile video service.  Or, he could opt for a wholesale model a la LightSquared, there are certainly enough companies out there looking for spectrum.  Either way, it’s sure to be interesting!

Rival Bids Seek to Stop Ergen from Scooping Up Satellite Spectrum

We weren’t able to get a hold of the court documents ourselves, but according to one respected wireless industry analyst, Harbinger Capital and Solus Alternative Asset Management earlier this week filed a non-binding offer to buy both DBSD and Terrestar for a total of $2.6b.  News service Bloomberg also reported on the rival offers for the bankrupt satellite concerns, though it didn’t include the pricetag.

Walter Piecyk of BTIG Research wrote in his blog March 2, 2011 that the offer values the combined 40 MHz of S-band satellite spectrum at $0.22 MHz POP.  This is compared to the $0.17/MHz POP, or $1b, that Dish Network (Nasdaq:DISH) offered for DBSD early in February.  The offers reportedly give creditors an opportunity to take equity in lieu of cash, which make them more attractive than Dish’s bid.

No word yet on how creditors or the bankruptcy court is responding but the move paves the way for a bidding war on the 40 MHz of satellite spectrum owned by the two companies….or not.

I’ve already written extensively on Charlie Ergen’s efforts, via Dish Network and Echostar, to gain control of these two companies, and this month I also commented on speculation that success in obtaining the satellite spectrum licenses would make Dish and Echostar that much more attractive to rumored suitor AT&T (NYSE:T).

But despite the very real opportunities that these licenses might open up for Dish, I see Ergen as a shrewd dealmaker who is as motivated by the game and a sweet deal as by the end result.  In other words, if his efforts to buy DBSD and Terrestar on the cheap wind up simply starting a bidding war, he may very well just walk away.  Ergen did say recently that his efforts to acquire the spectrum were for purely "investment purposes."

While there are ways that Dish could use the spectrum held by these two bankrupt companies, Harbinger Capital’s LightSquared needs it more, and sooner.  So it makes sense for Philip Falcone et al to pony up a little more and tilt the scales in Harbinger Capital’s favor. 

At that point, I wouldn’t be surprised to see Ergen begin to look for the next “fun” deal to get involved with.  Or maybe he should head back to Colorado and work on stopping the recent subscriber defections at Dish…

Under Construction:  The Ergen Satellite Empire

EchoStar (Nasdaq:SATS) and DISH Network (Nasdaq:DISH) founder Charlie Ergen is on a mission.  After falling behind in the DBS market share battle to rival DirecTV, in part because several of the larger telcos that resell satellite video service have opted to work with DirecTV, Ergen has clearly decided to build his own nationwide video and Internet satellite service set, by combining various satellite systems and spectrum licenses.

Less than two weeks after DISH made a $1b bid for bankrupt satellite concern DBSD, along with Ergen's efforts to take over bankrupt Terrestar via accumulation of outstanding bonds, EchoStar has offered roughly $2b for Hughes Communications. 

Englewood, Colo.-based EchoStar and Germantown, Maryland-based Hughes announced February 14, 2011 an agreement whereby EchoStar will acquire all of the outstanding equity of Hughes and its subsidiaries, including its main operating subsidiary, Hughes Network Systems, LLC. 

Under the terms of the transaction, which has been approved by the Boards of Directors of both companies, Hughes’ shareholders will receive $60.70 per share.  The bid represents a premium of 31% over Hughes' closing price of $46.43 on January 19, 2011, just prior to its announcing that it had engaged an advisor for possible sale of the company.

The offer is slightly lower than Hughes’ closing price the day before the announcement, however, and several legal firms have already stepped up to question the adequacy of the offer on behalf of shareholders. Hughes reportedly picked EchoStar after holding an auction for several interested buyers, including other companies and private-equity investors.  That process began in late fall.

The transaction is expected to close later this year, subject to customary closing conditions. Investment funds affiliated with Apollo Management IV, L.P., who own a majority of Hughes’ outstanding stock, have approved the transaction. If closed, the deal will give Apollo a 57% return on its 2004 investment.

Pradman Kaul, president and ceo of Hughes, said, "We are very pleased to announce this transaction as it brings together the two premier providers of satellite communications services and delivers substantial value to our shareholders. By combining Hughes’ operational strength and proven record of customer satisfaction with EchoStar’s expertise in cutting edge satellite video technology, customers will benefit significantly from our shared institutional excellence.”

"There is a unique and compelling fit between Hughes and EchoStar," said Michael Dugan, pres and ceo of EchoStar. “With a rich engineering culture, an extensive fleet of owned and leased satellites, and experienced personnel in communications centers around the world, the combination of EchoStar and Hughes will create a powerful leader in video and data transport.”

Based on the roughly $2b price tag, the offer comes in at about 1.9x last quarter annualized revenue.  Hughes, which promotes its broadband satellite Internet service primarily in rural markets with poor DSL or cable coverage, had 558,000 subscribers as of September 30, 2010 and monthly ARPU of about $75. The company also received $58.7m in broadband stimulus funds last year and began to offer services under the program last October.

Hughes’ satellite assets consist of SPACEWAY 3, a broadband satellite system with an architecture for broadband data communications, and Jupiter, an under-construction geostationary high throughput satellite.  Space Systems/Loral is manufacturing Jupiter, which will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the HughesNet service in North America. Jupiter is scheduled to launch in the first half of 2012. Hughes has also signed a lease agreement with Barrett Xplore for Jupiter, which will provide $245m in revenue over 15 years.

This latest announcement comes amid rumors that AT&T might be kicking the tires at EchoStar and/or Dish but it looks to us like Charlie Ergen has decided to go it alone. 

Yet Another Signal that the Satellite Space is Heating Up 

We wrote last week about the $1b bet DISH Network (Nasdaq:DISH) is making on DBSD, a bankrupt satellite concern with S-band spectrum holdings, and the speculation that DISH may be going for a mobile video play…Seems DISH’s Charlie Ergen isn’t the only one who likes the prospects for satellite’s role in the burgeoning broadband/ streaming video arena.

In filings with the SEC, money management firm BlackRock, Inc. disclosed that it now owns a 7.52% stake in DISH Network, or about 15.4m shares. BlackRock has also acquired a 5.1% holding in DIRECTV (Nasdaq:DTV), or about 42.5m shares. BlackRock has also reduced its ownership of cable TV giant Comcast (Nasdaq:CMCSA), from nearly 7.4% a year ago to about 7.2% as of February 3, 2011.  The money management firm filed as a passive investor in its DISH and DIRECTV filings.