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from: MultiChannel News

Moffett: AT$T/EchoStar Deal Doesn’t Add up

Analyst Says Merger Talk ‘Based on Flawed Premise’

By Linda Moss -- Multichannel News, 12/3/2007 12:55:00 PM

An AT&T acquisition of EchoStar Communications doesn’t make economic or strategic sense, according to Sanford C. Bernstein & Co.

“The very notion of an AT&T/EchoStar combination is based on a flawed premise; i.e. that AT&T needs video in order to compete with cable,” media analyst Craig Moffett wrote in a report Monday.

“The reason AT&T is losing phone lines to cable isn’t because cable has video and AT&T doesn’t,” he wrote. “It’s because cable has a marginal cost advantage. Pairing a satellite network and a phone network does nothing to address AT&T’s underlying cost problem.”

Moffett was addressing a recent report from The Street.com that AT&T and EchoStar, parent of Dish Network, were talking and close to a deal. As Moffett pointed out in his report, speculation that the telco is going to acquire the satellite company has been circulating for years.

Moffett cited a laundry list of reasons why he doesn’t think such a deal makes sense. They included:

* In the absence of underlying cost synergies, if AT&T were to discount EchoStar's service in a bundle (in order to achieve churn reductions), their margins would fall sharply, with devastating effect on EchoStar's cash flows.

* AT&T would need to invest in U-verse TV irrespective of EchoStar, in order to support broadband.

* EchoStar’s valuation cannot remotely be supported as an answer for AT&T's “rural” footprint alone.

* Programming cost savings based on EchoStar’s greater purchasing scale barely rise to the level of materiality over the next five years.

* Over the next five years, the expected expansion of AT&T’s U-Verse footprint and subscriber base poses a strategic threat to EchoStar.

Finally, Moffett noted that many EchoStar officials have recently cashed out stock, which wouldn’t make sense if an AT&T deal is near.

“Adding additional fodder to the ‘no merger’ camp is a recent torrent of insider-selling,” he wrote. “No fewer than 10 senior executives – including vice chairman and president Carl Vogel – were aggressively selling shares in recent weeks, with many selling essentially all of their shares…Obviously, it is hard to square this aggressive wave of selling with the notion of an imminent acquisition.”