(Bloomberg) -- Charlie Ergen’s decades-long dream to combine his satellite-TV company Dish Network Corp. with rival DirecTV hinges on the willingness of creditors he has irked in the past to write off part of their investment in the heavily indebted company.
Dish and DirecTV agreed on Monday to merge and create the biggest US pay-TV provider, in a move designed to help both companies better compete in an increasingly crowded TV landscape that’s been disrupted by streaming.
Yet the deal is contingent on a series of transactions involving a number of key players from AT&T Inc. to private equity firm TPG Inc. and Dish parent EchoStar Corp., the complexity of which EchoStar Chief Executive Officer Hamid Akhavan described on a call Monday as akin to “landing two to three 747s on the same runway at the same time without crashing.”
Key to all of it is a proposed exchange to help finance a portion of the transaction, which would require holders of five different series of Dish notes worth $9.75 billion to agree to take a principal loss of at least $1.568 billion on their holdings. Obtaining an agreement is far from guaranteed and there are early indications that at least some noteholders see the terms as inadequate, even if the deal as a whole makes sense and would create a stronger company.
“You need participation from the DBS bondholders and there’s a haircut of around $1.6 billion which is a big number,” said Stephen Flynn, senior credit analyst at Bloomberg Intelligence, referring to debt issued by Dish’s DBS unit. “There are a lot of things that still need to get done.”
An ad hoc group of Dish bondholders — advised by Lazard Inc. and Milbank — will gather on a call Tuesday to discuss next steps and consider their response, according to people familiar with the matter who asked not to be identified because the discussions are private. Just over two-thirds of DBS bondholders in each series of notes have to agree to the exchange, with the deadline set for Oct. 29.
Representatives for Lazard and Milbank didn’t respond to a request for comment, while a representative for Dish declined to comment.
A separate set of debt investors has already signed on — convertible bondholders at a different unit, whose deal sweeteners included new debt at the merged company. The transaction is contingent on tenders from 90% of holders of each of the convertible notes and over 85% have already agreed.
Ergen has also clinched crucial support from TPG for the sweeping deal. TPG Angelo Gordon has supplied roughly $2.5 billion to help take out bonds that are set to mature in November. Separately, TPG and AT&T announced a definitive agreement under which TPG will acquire from AT&T the remaining 70% stake in DirecTV that it doesn’t already own.
As far as his own finances are concerned, Ergen, already known for bold last-minute deals and complex financial maneuvers, is set to narrowly avoid seeing his satellite empire crumble. Dish was at risk of succumbing to a full-scale debt restructuring, including a possible handover of control to creditors, without another solution for the November payments.
Contentious Year
Monday’s announcement caps a turbulent year for Ergen and debtholders at Dish and EchoStar as the companies struggled to deal with approaching maturities and a towering debt load of some $20 billion. In January, EchoStar riled up investors when it moved its crown-jewel wireless spectrum licenses — among other assets — out of reach of bondholders, cutting the value of billions in existing debt. Weeks later, it scrapped plans for two transactions that would have restructured billions in debt after they faced creditor backlash.
Creditors eventually sued over the asset transfer move. Negotiations around that lawsuit and new financing began to heat up in recent weeks as debt maturities loomed.
Meanwhile, as speculation around a Dish-DirecTV merger swirled, Dish bonds rallied last week on the hopes that a deal would be favorable to creditors. They’ve since given back some gains, but are trading above the proposed exchange price, a sign investors see a chance for sweetened terms.
For instance, Dish 7.375% notes due 2028 traded up by about 15 cents on the dollar Friday to just below 80 cents. Under the proposal, those bonds would ultimately be swapped into DirecTV notes issued at 68 cents on the dollar. On Monday afternoon in New York, they traded at about 75 cents.
EchoStar ultimately sees the transaction as beneficial to debt holders who will be owning debt of a stronger company with lower leverage, executives said on Monday’s call.
“We’ll let the bondholders decide for themselves. We are offering them something that in our view is highly attractive and hope they recognize it and see it,” Akhavan said. “They do have an opportunity to work through the exchange period and get themselves comfortable with it.”
--With assistance from Irene García Pérez.
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