On Friday, rumors of Dish Network (DISH) and DirecTV (DTV) tying the knot sent shares of both firms higher during the trading session. The potential tie-up is nothing new; we had profiled the potential deal in March this year, but the re-hashing of the idea has some market participants excited. The anti-trust hurdles will be significant for this deal to happen, but it looks like the Department of Justice is warming up to allowing consolidation if recent progress of the merger between AMR Corp (AAMRQ) and US Airways (LCC) is any indication. We love the increased leverage over content creators, the significant cost savings, and the additional financial flexibility that a Dish Network/DirecTV merger would bring. We would expect the combined entity to be worth considerably more than the sum of the two individual firms.
We first added Teva Pharma (TEVA) to the portfolio of our Best Ideas Newsletter in July at just over $41 per share, and the company continues to hover around those levels today. We’ll never pick the exact bottom of a firm’s shares (nobody can), but the resiliency of companies that have registered a 9 on the Valuentum Buying Index in the face of unexpected bad news is astounding. Bloomberg reported rumors Tuesday that, if the company can’t find a new CEO soon, a merger with fellow generic-drug makers Mylan (MYL) or Valeant (VRX) may be in the cards. The possibility of the emergence of an activist shareholder that would push for change at the generic pharmaceutical giant is even more likely, in our view.
Valuentum’s Take
The capital markets continue to be very conducive to M&A activity. We think the odds of both deals happening are better than even, though the timing of any announcement or completion is uncertain. DirecTV is worth $80 on a standalone basis and would be worth quite a bit more if united with Dish Network. Teva is worth at least $50 per share even after considering mid-cycle declines in revenue and operating profits as a result of patent expiration of Capaxone. If Teva replaces a significant portion of lost profits from Capaxone over the next five years, shares are worth much more. We hold DirecTV and Teva in the portfolio of our Best Ideas Newsletter on the basis of their underlying valuation considerations and only view the potential for a takeout at a price much higher than current pricing levels as icing on the cake.