(Bloomberg) -- Just days before a key deadline linked to the proposed tie-up between Dish Network and DirecTV, talks with creditors have devolved into a dispute that threatens to upend the almost $10 billion deal.
At the crux of the row is a distressed exchange that would force bondholders to take a nearly $1.6 billion loss. Creditors say the proposal is “unworkable” and want to be paid back in full; DirecTV is threatening to walk away entirely if there’s no agreement on the exchange by Oct. 29.
Dish and DirecTV agreed to merge last month to create the largest US pay-TV provider under the control of private equity firm TPG Inc., a move touted as a way for both to better compete in an increasingly crowded TV landscape disrupted by streaming.
Holders of about $8.9 billion of Dish notes quickly banded together after the deal announcement and formed a blocking position. But recent correspondence between DirecTV and the debtholders show a stalemate that could thwart the entire deal.
The group of bondholders said the two companies have “crafted a deal that allows DBS’s shareholder to further siphon billions of dollars of value away from DBS,” while asking DBS’s creditors to voluntarily forfeit over $1.56 billion in value they are owed, according to a letter seen by Bloomberg. “It should be no surprise to anyone that such a deal is unworkable.”
That came after DirecTV rejected a counteroffer from the bondholders, according to a separate letter seen by Bloomberg. The company maintained the exchange was a fair proposal, offering a premium to where the debt had been trading nearly a year ago and even more recently before the tie-up was announced, and said it would have “no choice but to exercise its rights and terminate” the deal.
“Time is of the essence,” attorneys for DirecTV said in the letter.
Ropes & Gray, serving as DirecTV’s legal counsel, and Milbank, representing the creditor group, did not respond to requests for comment.
In its letter rejecting the counteroffer, DirecTV argued that without a deal, Charlie Ergen, the co-founder and chairman of Dish, will also be able to take more cash out of the business. DirecTV added it can’t take on more debt as it lacks the capacity to do so under existing agreements.
Creditors remained steadfast after DirecTV’s letter: going forward, the company can negotiate further, close the acquisition as is and “pay a premium to do so,” or face continued litigation, the group said. Dish Network and its creditors are also currently engaged in a court battle over the transfer of valuable assets, including a handful of wireless spectrum licenses, out of the reach of creditors.
The deal is contingent on a series of transactions involving a number of key players including AT&T Inc., TPG and Dish parent EchoStar Corp. One requirement is that bondholders consent to exchange old debt for notes issued out of the new combined entity, though the debt restructuring plan would impose haircuts as high as 40% of face value.
(Updates with more details throughout.)
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