EchoStar Restructuring Worth Only 1.6%? (DISH, DTV)

EchoStar Communications Corp. (NASDAQ:DISH) has announced that its board of directors has directed management to pursue a possible separation of its businesses into two distinct publicly traded companies.

EchoStar recently submitted a request to the Internal Revenue Service for a ruling as to the tax-free nature of the transaction. 

• Under the proposed plan, EchoStar’s U.S. consumer pay-TV business would continue to operate as the DISH Network.
• Most of the company’s other technology and infrastructure assets would be spun-off in a transaction intended to be tax-free to EchoStar and its shareholders. Upon completion of the spin-off transaction, the shareholders of EchoStar would have separate pro rata ownership interests in each company.

The transaction would be transparent to DISH Network’s over 13.585 million U.S. DBS customers. Installation, customer service, billing and other consumer services would continue to be operated by DISH Network, together with most satellites and spectrum used to support that subscriber base. Mr. Ergen would continue to serve as Chairman and CEO of DISH Network, and would fill the same roles with the spun-off company.

The spin-off assets would include The following:

• EchoStar’s set top box design and manufacturing business;
• International operations;
• Assets used to provide fixed satellite services to third parties, together with satellites, uplink centers and spectrum licenses not considered core to DISH Network’s subscriber business.

The set-top box business shipped over 9 million units in 2006 to DISH Network and international customers.

The spin-off is of course subject to certain conditions and the company is preparing a registration statement for filing with the SEC.  What is interesting here is that the shares are indicated up less than 2%.  A spin-off of this nature will be quite costly at first, and with an $18+ Billion market cap the company will want to see more of a response before endorsing this.  Satellites do have a value to be opened up and the operations could be unwound into separate entities, but the argument is obvious in that many will disagree with the benefits.   

If this works you could expect that DirecTV Group Inc. (NYSE:DTV) may follow suit.  But if this turns into a quagmire then DirecTV is going to be able to eat EchoStar’s lunch for a couple quarters.  This will be an interesting review for our Special Situation Investing Newsletter in the coming days or weeks.

Jon C. Ogg
September 25, 2007

Jon Ogg can be reached at [email protected]; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.