A US Citigroup analyst is putting about the idea that Liberty Media and its larger than life entertainment mogul CEO, John Malone, will try to buy the remaining majority chunk of DirecTV that it doesn’t own, after the transaction with News Corp that gives it control of the US satellite TV player, is completed, at the end of the year.
Citigroup analyst Jason Bazinet put out a note suggesting that the right share price for DirecTV was closer to $30 simply because that’s how high Malone is thought to be prepared to go to acquire the entire business. Today with the price at around $24, Malone must be ambivalent about the report, which sounds to us like an easy way to move the share price.
If the share price does go close to $30 then Malone will have made a cool 20% on the $13 billion that he paid for his 38% controlling stake. But at the same time it will likely commit him to the $30 price tag, and put a similar 20% hike on what he has to pay for outright ownership. Instead of him being able to kick off the bidding around $18 billion, Malone might have to find more than $20 billion to buy out the remaining shareholders.
Unlike US analysts, we are not in outright awe of the legendary Malone. It is incontrovertible that he can lay his hands on this amount of money, but just what will he do with the resulting asset once it is in his hands?
Already we have seen that DirecTV has chosen, quite deliberately, to spend less on customer acquisition, in order to show a greater profit, and has halved its rate of net quarterly additions. EchoStar has not followed suit and the result is that EchoStar is accelerating towards leadership, from a position where it has 2 million less customers. At the current rate of customer acquisition it will take EchoStar two more years to catch DirecTV.
It is clear that Malone has a very concrete idea for DirecTV, which should improve its value. He just hasn’t told anybody what it is. Some say this may be either a merger with EchoStar or a sale or partnership with AT&T or potentially both. If he can drive up the price considerably in this way, then he should acquire all of the operation.
We have said in the past that a full triple play, using Clearwire’s WiMAX network, is both do-able and would be hugely beneficial to the high churn rate of DirecTV, but this will take a few years to play out in a noticeable proportion of the customer base, although such a deal is already announced. What that requires is someone with patience to keep the system on track and quietly go through the gears. Malone’s style is different. He is more likely to drive value by consolidation and the creation of an irresistible customer offering that creates a huge spike in asset value overnight as the stock market appreciates his proposition, even before the public does. What Murdoch was doing was more of the former, quietly acquiring more customers than every other pay TV operation in the US, and driving out unnecessary costs. Either way shareholders will be rubbing their hands with glee at the Citigroup note.
Will they still be rubbing their hands, or crying foul, once Malone’s plan is fully understood? Jury’s out on that one.