Why EchoStar Stock Plunged 18% Today

So it seems the rumors were true.

Two weeks after Bloomberg broke the story that the merger between them, again, again EchoStar (SATS -10.84%) and DirecTV could be back on, EchoStar this morning announced a “transformational suite of transactions to reduce its balance sheet and improve its debt maturity profile.”

Investors are unimpressed. EchoStar shares were down 18.5% by 10:15 a.m. ET on the news.

How the Dish-DirectTV merger will work

As EchoStar describes the deal, it primarily relates to the company’s decision to sell its Dish and Sling TV businesses to DirecTV. Instead of paying however, to acquire these businesses, DirecTV will assume only $9.8 billion of their debt. EchoStar investors can’t be happy about not getting paid.

In addition, EchoStar noted that private equity group TPG and other investors will invest $2.5 billion to “fully refinance” EchoStar’s remaining debt. EchoStar will take on $5.1 billion in new debt in exchange for some much-needed cash. The company plans to use this money to build out its “nationwide Boost Mobile 5G Open RAN network”, becoming much more of a pure-play mobile phone company.

Finally, to sweeten the deal for certain investors, EchoStar will conduct a private equity investment transaction (PIPE), privately selling 14.3 million shares to raise an additional $400 million.

What does this mean for EchoStar shareholders?

In short, EchoStar is getting out of the satellite TV business, while DirecTV is digging deeper. While the intricacies of EchoStar’s “transformative transaction suite” are confusing, the bottom line appears to be this:

EchoStar is currently unprofitable and saddled with $25.3 billion in debt, compared to just $520 million in cash. By selling Dish and Sling to DirecTV, it will ease its debt, reduce its interest payments and move closer to profitability. The company also extends its debt and pushes it a few years down the road as it assumes More debt and sale More actions to raise cash.

Ultimately, the company will look to use this new cash to forge its new identity as a pure-play mobile phone provider.