EchoStar has a two-track mind

Shares leap as Ergen mulls sat TV, technology split

Shares of EchoStar Communications jumped 6.8% on Tuesday after the company said that it is considering splitting into two publicly traded stocks to unlock shareholder value.

One part would house its traditional satellite TV business, the other technology and infrastructure businesses, including tech up-and-comer Sling Media, which EchoStar said late Monday that it will acquire in a $380 million deal (HR 9/25). Sling's offerings allow consumers to watch TV content on such Internet-enabled devices as computers and cell phones.

Other spinoff assets would include EchoStar's set-top box design and manufacturing business, its international operations, assets used to provide fixed satellite services to third parties and certain spectrum licenses.

EchoStar closed at $44.14 as analysts said a split could create shareholder value. However, others argued that the firm's technology assets don't have much value yet.

Bear Stearns analyst Spencer Wang said a split would mainly allow EchoStar to invest in expanding its wholesale satellite services without financial impact to its core satellite TV business. It also would allow chairman and CEO Charles Ergen "to keep a separate company that he could run and expand if he were to sell/merge the consumer business," Wang added.

Observers have long suggested that Ergen could sell to AT&T or competitor DirecTV Group.

In the potential separation, EchoStar would continue to operate its Dish Network and spin off its other technology and infrastructure assets if the IRS rules such a move tax-free. EchoStar shareholders would have separate pro rata ownership interests in both companies.

"Separation of our consumer-based and wholesale businesses could unlock additional value," said Ergen, who would serve as chairman and CEO of both companies. "Each company would be able to separately pursue the strategies that best suit its respective long-term interests."

Wedbush Morgan Securities analyst William Kidd said he sees "considerable merit" in a spinoff, estimating a value of the spun-off assets of "well over $1.5 billion."

Kidd also said that the Sling acquisition could benefit EchoStar as well. "We suspect that Sling's technology has been underutilized," he said. "We suspect its potential is far greater embedded in other devices than being sold as a stand-alone retail device. It could be a natural edge or simply an evolution for pay television providers to offer such place-shifted television to their subscribers."
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