|Shares Out. (in M):||85||P/E||NA||NA|
|Market Cap (in $M):||1,703||P/FCF||NA||NA|
|Net Debt (in $M):||-1,109||EBIT||0||0|
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Readers may recall, as outlined in the earlier VIC posting, that SATS is a spin-off from DISH Network comprised of (i) a set-top box business housing some innovative technology, such as SlingMedia, (ii) a satellite services business with [six] owned and [eight] leased satellites that provides Broadcast Satellite Services to DISH and fixed satellite services to corporate and government-type customers, (iii) substantial cash and marketable securities amount to $10.80 per share, (iv) other investments totaling $7.18 per share, and (v) a variety of hidden assets such as international joint ventures like direct-to-home satellite operators in Mexico and Taiwan, the DISH corporate headquarters and other long-term investments in satellite and spectrum-related opportunities. The Company's principal customer is DISH Network; like SATS, Charlie Ergen owns about half the company's equity through super-voting shares. A bullish thesis has always depended on the Company winning new third party customers and filling out its substantial unused capacity, as well as Charlie Ergen smartly allocating the Company's capital.
Anyone who has followed the Company may now ask why it's worth revisiting at this point in time. With that, we offer the following observations regarding recent developments with the business that should begin to shine through the financial results and serve as catalysts to unleash value for stockholders.
New set-top box customers wins
After the original spin-off, some skeptics wondered whether SATS could keep its only meaningful third party customer at the time (Bell Canada) much less win new customers for its set-top box offerings. The Company has since solidified its relationship with Bell Canada. But, the exciting development in recent weeks is that SATS has made some major breakthroughs with third party customers.
First, SATS entered into an agreement to provide Unitymedia (Germany's #2 MSO with 4.5 million subscribers) with its next generation boxes for the transition of its subscriber base from analog to digital service. The digital rollout has just begun for Unitymedia this summer, and Unitymedia intends to support the transition with ad campaigns and a long-term plan to target the full subscriber base in a move to digital TV. In this original phase, there are currently no DVR or Sling features embedded in the boxes, but that remains an opportunity down the road. Unitymedia chose Echostar as its provider for digital set-top boxes after conducting a thorough RFP process. Interestingly, Unitymedia is owned by Liberty, which has numerous international cable holdings. When asked about the Unitymedia deal on the recent quarterly call, management stated "...all feedback that we have gotten so far is the product launch has gone very successful. As a matter fact, they told me it was the smoothest product launch that they've seen in a long time. So we're optimistic that we can prove ourselves in this tough market to all those Liberty properties and get out to market. "
Second, management stated that they are also shipping products to Telefonica in Latin America. They did not mention which country (or countries) or the extent of the agreement, but to gauge the potential opportunity, Telefonica states that it has 1.7 mm total pay TV subs in its Latin American operations (and obviously many more globally).
As a shareholder, management's desire to run SATS like a private company can be frustrating in that they are so reticent in communicating details of these opportunities, and there were certainly no press releases. As a matter of perspective, Unitymedia (with 4.5 mm subs) would be the equivalent of a top-5 US MSO like Cox/Charter/Cablevision which have 3-5 mm subs each.
The set-top box business houses innovative products like SlingMedia which have additional commercial potential. DISH Network has just launched a new set-top box that integrates the Sling feature set and allows users to watch their pay TV channels on computers and mobile devices. Sling features may or may not to prove to be a breakthrough product, but considering the valuation (discussed later) the opportunity remains pure upside.
Business development in satellite services - IPTV initiatives, new launches of fully-leased satellites
Charlie Ergen hired Dean Olmstead to build out the satellite services business after the spin-off; Dean is well-regarded in the industry and built out the SES Americom business prior to joining SATS. Charlie has always like the financial characteristics of the satellite services businesses, which feature long-term contracts with reliable cash flow streams. Dean suffered some health issues in 2008, but seems to be recovered and fully engaged now in the business. The progress here has started to show. SATS provides essential services to DISH on a contractual basis through the portfolio of six satellites that SATS owns, and it also manages the fleet of satellites for DISH that remain on the DISH balance sheet. In addition, SATS will put a new satellite into service over the next year or so (Echostar XVI) which is fully pre-leased to DISH. In addition, SATS will launch Quetzsat, a new satellite fully pre-leased to provide broadcast services to DISH Mexico, of which SATS is 50% owner. Furthermore, SATS continues to rack-up customer wins on the significant spare capacity it had in its fleet of owned and leased satellites for initiative like IPTV service to provide digital TV to smaller and rural legacy cable operators who previously could not offer digital TV economically to their subscribers. These deals are clearly smaller, but revenue growth is picking up nicely in the satellite services business as these sorts of deals add to the mix.
New, dedicated management team
At the time of the spin-off, Charlie Ergen functioned as co-CEO of both DISH and SATS, and SATS executive management team was largely borrowed from DISH through a services agreement. This arrangement continued through late 2009. Although Charlie maintains his ownership and Chairman role at SATS, Mike Dugan was brought in as CEO in late 2009. Dugan was previously COO of DISH Network until 2004 and a board member at DISH thereafter. He apparently took the lead of many of the technical and operational issues at DISH while COO, and Charlie persuaded him to join SATS as CEO. Former co-workers of Dugan and former employees of DISH/SATS have great things to say about him, and they think he brings needed focus and energy to the efforts of building out SATS businesses. Importantly, as someone who has worked a long time with Ergen, he apparently has his respect and is one of the few who can stand up to him. In addition to Dugan, David Rayner was appointed as SATS CFO recently. Rayner was previously CFO and and EVP at DISH Network.
We believe that SATS struggled to get the necessary management attention and focus, as DISH has been fighting its own operational battles over the last three years. With the addition of these key executives and the recovery of Dean Olmstead's health, we believe that SATS is in a vastly improved position to exploit commercial opportunities today compared to two years ago.
Tivo indemnity from DISH Network
The litigation between Echostar/DISH and Tivo was a significant overhang at the time of the spin-off. In the past year, DISH has granted SATS an indemnity for any damages related to the TIVO litigation. Whereas this was difficult to estimate and handicap in the past, investors now know that SATS is shielded from any damages through the DISH indemnity (subject to DISH's creditworthiness under the indemnity, of course).
Capital allocation observations - Sirius and SatMex
We do not know how Charlie Ergen plans to use the available cash of over $900 million. There is a $500 million share repurchase authorization, and the Company has bought back stock at higher prices. We also now have a glimpse into two transactions that SATS has attempted, and, in retrospect, they appear savvy. Charlie Ergen purchased Sirius radio bonds and tried to acquire the company through distress in early 2009. He was outbid by Malone, but had he succeeded, it appears that it would have been quite a successful acquisition. As it turned out, SATS investment in the bonds doubled in value after being repaid through the Malone/Liberty recap. Subsequently, SATS made an offer to acquire SatMex out of distress. The bondholders turned down SATS' original offer, and SATS walked away. We have read subsequently that the SatMex group approached Echostar to reconsider. If anything, we take some comfort in the discipline that SATS displayed here.
Ultimately, we agree with the assessment in vinlin's original SATS write-up. Charlie Ergen owns approximately 56% of the equity (economics) of SATS, and he has a clearly demonstrable track record as a smart entrepreneur and commercial allocator of capital. Put it this way: SATS tangible book value (after significant impairments taken post spin-off) is over $30 per share. Here we have the opportunity to back one of the best executives in media with an incredible track record of creating shareholder value at a discount - not a promote - to the assets that he is bringing to the table. This strikes us as a highly exceptional and rare opportunity.
The bottom line is that we feel SATS presents an unusually asymmetric risk/reward to investors at today's price. Even setting aside the value of the DISH headquarters and whatever value Sling may have, an investor today is getting the businesses at ~1.9x TEV/EBITDA and the stock at nearly a 40% discount to tangible book value.
To gauge fair value, we applied some multiples to the Company's LTM earnings. Note that these include no impact or upside from new customer signings in the set-top box business, as confirmed by management on the recent call. The earnings are based on a trailing snapshot, and there are still multiple avenues of upside in these numbers as the business takes shape. On this basis, we estimate the fair value would be around $40 per share with additional option value on the business development opportunities.
|Cash and Investments (Non-operating):||Balance at|
|6/30/2010||Change||Adjusted Value||Per Share|
|Cash and CE||122.3||0.0%||$122.3||$1.44|
|Current marketable securities (1)||797.2||0.0%||797.2||9.36|
|LT investments (2)||611.2||0.0%||611.2||7.18|
|Total Cash and investments||1,530.8||17.98|
|Contingent liabilities (3 - Tivo)||(5.0)||(0.06)|
|Net Cash and Investments Value||1,525.8||17.92|
|Business (Operating Assets):||PF FY||Actual||LTM||Multiple Range||Implied Value||Per Share Value|
|FSS EBITDA (4)||181.6||177.9||244.3||7.5x||8.5x||1,831.9||2,076.2||21.52||24.38|
|Value of International Operations - Mexico DTH JV, Taiwan DTH JV, etc...|
|Sling Media Revenue (5)||23.2||0.0||0.0|
|Sling Media EBITDA (5)||(29.8)||0.0||0.0||(6)||0.0||190.0||0.00||2.23|
|Rental income (7)||13.6||13.6||13.6||7.5%||7.5%||181.3||181.3||2.13||2.13|
|Debt (Satellite capital leases - likely non-recourse)||(422.3)||(422.3)||(4.96)||(4.96)|
|Net Business Value (Operating)||1,538.26||2,208.91||18.07||25.94|
|Total Equity Value (Net Cash, Investments and Operating)||3,064.0||3,734.7||$35.99||$43.86|
|Est. per share value (NAV)||$35.99||$43.86|
|Upside to current price||94.5%||137.1%|
|(1) Includes ~$450 mm of VRDNs at 6/30/09 and 30 mm Terrestar shares and other undisclosed securities and other undisclosed investments.|
|(2) Includes JV investments, long-term strategic loans and investments (e.g., Terrestar), etc..|
|(3) DISH indemnifies SATS for any Tivo liability subject to $5 million deductible.|
|(4) FSS segment does not reflect significant unleased capacity on 2-3 in-orbit satellites that could contribute incremental ~$100-150 mm FSS revenue. In addition,|
|the Nimiq 5 satellite which is leased to DISH was launched in October 2009 and QuetzSat-1 is scheduled for launch in 2011 and SATS will launch Echostar XVI.|
|(5) Sling revenue and losses/R&D costs allocated to set-top box segment.|
|(6) Sling implied value calculated as % of cost b/c EBITDA contribution is negative for 2008.|
|Purchase Price (Oct. 2007)||$380.0||$380.0|
|(7) Value of DISH and Echostar headquarters based on cap rate applied to lease income. DISH unsecured bonds currently yield ~7.5%.|
|(8) Assigns weighted average multiple to G&A based on proportionate EBITDA.|
As a completely theoretical exercise in an attempt to frame the value of new customer wins, we tried to pin some assumptions around the earnings power that the Unitymedia deal could generate. Assuming that SATS will earn similar margins per subscriber from Unitymedia as it does from DISH (note that SATS gross margin from DISH sales are the lowest in the industry), such a deal could be theoretically be worth an additional $2-4 per share. More important than just a single customer value could be the catalyst from demonstrating commercial success with new third party customer wins.
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