DirecTV/Dish merger has a problem as debt holders object to $1.6 billion loss

DirecTV's agreement to buy the Dish satellite and streaming TV business from EchoStar is facing opposition from Dish creditors who would be forced to take a loss on the value of their debt. Dish creditors "plan to block a distressed exchange that's a key part of its tie-up with rival DirecTV, according to people familiar with the matter," Bloomberg reported today. "A group of steering committee investors has gained a blocking position in order to negotiate with the company, the people said. They may even explore a better outcome through litigation, said some of the people." The Bloomberg article was titled, "Dish-DirecTV Deal Sparks Creditor Revolt Over $1.6 Billion Loss." As Bloomberg notes, "Dish needs consent from its bondholders to exchange old debts for notes issued out of the new combined entity" in order to complete the deal. A previous Bloomberg article said that "just over two-thirds of [Dish] bondholders in each series of notes have to agree to the exchange, with the deadline set for October 29." EchoStar executives argue that debt holders will benefit from the merger by "owning debt of a stronger company with lower leverage," the article said. Credit-rating firm S&P Global said in a research note that it views "these transactions as tantamount to a default because investors will receive less value than the promise of the original securities," according to Variety. On the other hand, S&P Global "added that in exchange the new notes will carry a higher rate of 8.875 percent and be secured by assets of the combined businesses of DirecTV and Dish," Variety wrote.

Debt exchange

DirecTV agreed to buy the Dish satellite TV and Sling TV business for a nominal fee of $1 in exchange for taking on $9.75 billion of Dish debt. But DirecTV's deal announcement on Monday said the merger needs approval from Dish debt holders, who would see their investments devalued. Dish notes would be exchanged with "a reduced principal amount of DirecTV debt which will have terms and collateral that mirror DirecTV's existing secured debt," DirecTV said. DirecTV's announcement goes on to say that the principal amount will be reduced by at least $1.568 billion and that the deal can be scrapped if debt holders object:

Such mandatory exchange is conditioned, amongst other things, on an aggregate reduction in the principal amount of Dish DBS' notes in such exchange of at least $1.568 billion. If noteholders do not accept the Exchange Offer on terms satisfactory to DirecTV, including to the extent the above mentioned minimum principal reduction is not achieved, it has the right to terminate the acquisition without closing.

The Bloomberg article said the debt restructuring plan would impose "haircuts as high as 40 percent of face value." The investors seeking to block the deal are being advised by Lazard Inc. and Milbank LLP. The deal has supporters as well, Bloomberg wrote:

Those who support the restructuring point out that Dish is providing a coupon bump to consenting lenders and a premium to market trading levels before the deal was announced. The combined entity will also carry less debt, have higher ratings and generate more cash, according to these people who also declined to be identified because the discussions are private.

Deal needs regulatory approval

The merger also needs regulatory approval. A potential DirecTV/Dish merger was scrapped two decades ago after the US Department of Justice filed an antitrust lawsuit. The DOJ said in 2002 that the merger "would eliminate competition between the nation's two most significant direct broadcast satellite services." DirecTV and Dish are still the dominant satellite TV providers, but the video industry has changed significantly because of the rise of online streaming. AT&T bought DirecTV for $48.5 billion in 2015 but lost about 10 million customers before spinning it off into a new entity. DirecTV argues that the merger with Dish "will benefit US video consumers by creating a more robust competitive force in a video industry dominated by streaming services owned by large tech companies and programmers." AT&T owns 70 percent of DirecTV but plans to sell its stake to private equity firm TPG, which owns the other 30 percent. The DirecTV/Dish merger does not include the Dish Network cellular business, which will continue to be owned by EchoStar.