Dish Beefs up with Blockbuster Purchase

Dish Network (NASDAQ:DISH) recently agreed to acquire Blockbuster which filed for bankruptcy last year. While this move will clearly make Dish Network stronger in terms of its movie and content offerings, it also adds some risks that the company could overextend itself after recently completing another acquisition and it heightens the level of competition among competitors like Netflix (NASDAQ:NFLX) and DirecTV (NASDAQ:DTV). Earlier this year, Dish acquired DBSD that will provide the company with broadband spectrum and could allow it to pursue mobile and data services at some point. This move could pit the company more directly against telecom operators like AT&T (NYSE:T) and Verizon (NYSE:VZ).

Our price estimate for the company stand at $27.77, implying a premium of roughly 15% to the market price.

A Brief Look at the Blockbuster Deal

Dish stated the below in its press release:

DISH Network Corporation (NASDAQ: DISH) announced that it was selected as the winning bidder in the bankruptcy court auction for substantially all of the assets of Blockbuster, Inc.  DISH Network’s winning bid was valued at approximately $320 million.  After certain adjustments are made at closing of the transaction, including adjustments for available cash and inventory, DISH Network expects to pay approximately $228 million in cash to acquire Blockbuster at the closing which is expected to occur in the second quarter of 2011. ((DISH Network Agrees to Acquire Blockbuster Assets, Dish Network Press Release, Apr 6 2011))

Blockbuster is the second acquisition that Dish has made recently following its recent purchase of DBSD North America. It looks like Dish is willing to pick up distressed assets at bargain prices to strengthen its own portfolio, which can open up more strategic alternatives longer term though this comes with the risks that it overextends itself and brings increasing pressure from bigger competitors in these businesses.

How Dish Gains

Clearly, the company aims to become more competitive in the pay-TV market. Currently, Dish is facing threats from a few directions. These include the increasing popularity of fiber-optic pay-TV services from companies like AT&T and Verizon, a lack of bundled offering that consumers tend to prefer and its closest competitor DirecTV is thriving and winning new customers on a net basis while Dish has struggled in the recent past.

Although Blockbuster has filed for bankruptcy and closed several of its locations, Dish will probably look to leverage its brand and promote it as a complementary streaming service. While it is unclear that how Dish will operate Blockbuster’s stores, it certainly makes sense for the company to replace them either with a streaming service, or with a combination of streaming and kiosks.

Does Dish have enough bandwidth to delivery such streaming service at large scale over the Internet? This is where the acquisition of DBSD comes in, which gives Dish access to additional spectrum thereby making it possible for the company to potentially develop a wireless network in the future to support data.

Ultimately, the aim is to gain subscribers and improve market share, which is included in the chart above.

Implication for Netflix

Netflix will no longer face a crippled Blockbuster but instead a stronger competitor that has been shedding many of its poorly performing brick and mortar stores. Blockbuster will now have an improved focus and the backing of a large satellite pay-TV provider in Dish Network. With Dish’s support, Blockbuster will have enough capital and buying power to acquire streaming content at better terms, which could help push up the content acquisition costs for Netflix and others in the industry.

With a more appealing product offering, Dish could also slow the subscription rate of Netflix and pontentially gain some market share from other pay-TV services offered by cable or phone companies.

See our full analysis for Dish Network’s stock here.