🛰️ Dish up a deal

Today we're taking a deep dive into a multibillion-dollar media merger that somehow also has a negative valuation. In 959 words, 4 minutes.

The acquisition of Dish Networks by DirecTV is a deal 22 years in the making — and there are numerous ways it can fall apart.

Why it matters: Even by the standards of media dealmaking, this is an astonishingly convoluted deal, featuring highly sophisticated players — TPG and Charlie Ergen — who, despite being on opposite sides of the table, are teaming up to get concessions from an equally sophisticated group of bondholders.

The big picture: The deal, announced Monday, only gets done if a large majority of Dish bondholders agree to it — something that seems unlikely to happen with the deal in its current form.

• Bondholders aren't usually consulted in a merger. But this is a distressed deal in which the equity appears worthless — so the lenders scrambling to get paid back are actually the ones in control.

Where it stands: The George W. Bush administration first prevented DirecTV from buying Dish in 2002, saying it would stymie competition.

• Today, however, both companies are bleeding subscribers, thanks to the way in which streaming has supplanted old-fashioned linear TV — and the way in which wireless internet has replaced satellite in much of rural America.
• As a result, the antitrust argument is less compelling now than it was in 2002. Still, no one knows how regulators will react to this announcement, and it's still possible the merger will fail FTC scrutiny, especially if Lina Khan remains chair in a Kamala Harris administration.

Meanwhile, Dish has $2 billion of bonds maturing in November, no money to pay them off, and no real ability to refinance that debt.

• Translation: It has some urgency in terms of finding a willing suitor.

The details: Dish is being sold for a negative amount of money. DirecTV is paying a nominal $1 for the equity, and is asking Dish's bondholders to swap $9.75 billion of existing debt into about $8 billion of new bonds — that means a nearly 20% loss of principal, which many bondholders aren't happy about.

• DirecTV is being bought by TPG as part of a concurrent deal.
• TPG in turn is spending $2.5 billion to pay off the November bond maturities, and throwing in another $500 million to cover operating expenses for good measure.
• It's able to find that kind of cash thanks to its acquisition late last year of Angelo Gordon, a deep-pocketed lender. The idea is that if and when the deal goes through, the combination of DirecTV and Dish should easily be able to repay the new $2.5 billion loan.

The catch: None of this can happen without bondholder approval, and right now the bondholders don't seem to be particularly inclined to go along with the deal.

The bottom line: This deal has a huge number of moving parts, and its final shape is still far from clear.

There are broadly two reasons a bondholder might agree to the swap being offered.

• The first is just as a trade: If you can buy the old bonds at a large discount, and swap them into new bonds that trade at little or no discount, then you can make a profit.
• The second is that there are punitive exit consents. Specifically, when a secured bondholder agrees to do the swap, they also have to agree to remove the lien from the old bonds, effectively turning anyone who doesn't agree to do the swap into a junior unsecured bondholder.
• Bondholders therefore have an incentive to agree to the swap for fear that if they don't agree, they will lose their seniority and end up holding bonds that are much less valuable.

Follow the money: Dish needs roughly 83% of its bondholders to agree to this deal.

• If the bondholders collectively approve a deal and it gets all necessary regulatory approvals, then all bondholders — even the ones who voted against the deal and who held onto their own bonds — would have little to worry about.
• That's because DirecTV, which will now be responsible for repaying the bonds, is much less leveraged than Dish — and is valued at $11 billion. (It was valued at $48 billion when it was acquired by AT&T in 2014, but that's now water under the bridge.)
• In other words, refusing the discounted swap will have paid off: "If the merger goes through, bondholders who hold out probably get all of their money back, without getting any haircut," Josh Kramer of CreditSights tells Axios.

On the flip side: If bondholders collectively agree to block the deal, they can try to negotiate better terms. But they also run the risk that Dish will file for bankruptcy instead, leaving them even worse off.

• The worst-case scenario for any individual bondholder would be if (a) they voted against the bond exchange but it went through with the support of other bondholders; (b) the deal then got killed by regulators; and (c) Dish then filed for bankruptcy.
• In that scenario, refusing the swap could be ruinous: They're now junior bondholders — thanks to those exit consents — which "would dramatically decrease recoveries in a bankruptcy," Kramer says.

Zoom out: Bondholders have enough leverage that they will probably be able to negotiate themselves a better deal than the one currently on the table.

• After all, while Dish owner Charlie Ergen isn't being paid for his Dish shares, he's still entitled to some $1.5 billion of Dish cashflow under the terms of the deal. He could give up some of that money, and/or Dish could just issue more of the new bonds as part of the exchange.

The bottom line: Dish Bondholders were already aggrieved at Ergen after he tried a controversial maneuver in January. Now they're going to try to extract as much value as they can from him.

Reach execs and business leaders with Axios.

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Reach execs and business leaders with Axios.

We'll help you tell your story in the right way:

• We'll distill your brand's message into its most effective form with Smart Brevity.
• No clutter, no filler — just clean, smart and effective.

Contact us to learn more.

Thanks to Aja Whitaker-Moore for inspiring this newsletter, to Kate Marino for editing and to Mickey Meece for copy editing.