M&A Deals of the Year
Introduction   Apple and partners-Nortel   Google and Motorola Mobility   Access Industries -Warner Music   Cumulus Media-Citadel   Comcast-NBC Universal   H&R Block-TaxAct   Caterpillar-Bucyrus   Ares and CPPIB-99 Cents Only Stores   Grupo Bimbo-Sara Lee baking assets   BHP Billiton-Petrohawk   Peabody Energy-Macarthur Coal   Selling off Bank of America   Dish Network-Blockbuster   Amgen-BioVex   KKR et al.-Samson Investment   Pearson-Connections Education   Alleghany-Transatlantic   Breaking up Dexia

Charlie Ergen's considerable stratagems induced no small amount of head scratching in 2011. A prime example was the $320 million purchase by Ergen's Dish Network Corp. of bankrupt video retailer Blockbuster Inc. Ergen's satellite television company beat out Carl Icahn and South Korean telecom SK Telecom Co. Ltd. in an April bankruptcy auction for Blockbuster. Just $226 million of the payout was in cash.

For all of its brand-name recognition, Blockbuster was an eroding asset, the company had a fledgling streaming business, its stores were troubled, and the outlook for selling satellite dishes at Blockbuster was less than inspiring.

Was Ergen, known for a parsimonious streak, simply bargain shopping, or is there a grand scheme? "I don't think they would have bought it if they didn't think there was some strategic value," says Bryan Kraft, who runs cable and satellite research at Evercore Partners Inc., "but I don't think they fully understand yet what that strategic potential is."

Blockbuster stands out as an example of shrewd low-balling by Ergen, who lost out to John Malone for a distressed investment in Sirius XM Radio Inc. two years earlier. The price represents a sliver of the $1.4 billion in debt Blockbuster listed in its bankruptcy petition. Kraft notes that Ergen's bid was at, or below, the liquidation value of the assets. Dish, in a sense, is playing with house money.

The real test will be proving the strategic value, something Dish has already started to do. While the Blockbuster marquee dimmed in bankruptcy, Dish is using the brand and its licensing agreements in its new video packages.

It is an enigmatic proposition: Ergen will use Blockbuster to conquer Internet video, which was, of course, the force that bankrupted Blockbuster.

The first peek at a strategic vision came in September with the introduction of Blockbuster Movie Pass. The service offers Dish subscribers DVDs by mail, as well as streaming movies and video games, for $10 per month. New Dish subscribers would get it for one year free.

Dish acknowledged it has a lot of work to do with Blockbuster's stores in its most recent earnings call. Blockbuster had shuttered stores during bankruptcy, but if locations don't break even, Ergen could shut more.

Marci Ryvicker, an analyst at Wells Fargo Securities LLC, called the Blockbuster promotion "characteristically Charlie, i.e., understated yet brilliant," in a report. The package would boost revenue per customer without adding much programming cost, she wrote. The plan could also limit customer defections.

Dish has amped up the package. At the recent Consumer Electronics Show in Las Vegas, Dish announced it had increased the Blockbuster streaming library to 10,000 movies and TV shows. The company also introduced a new, two-terabyte DVR for storing content.

The Blockbuster plans may benefit from the recent customer relations gaffes by Netflix Inc. CEO Reed Hastings took knocks last year for Netflix's unpopular price hikes and an aborted plan to split its DVD and streaming services. Dish and Netflix shares took opposite trajectories in 2011. From the start of January 2011 to the first trading day of 2012, Dish gained more than 60%, climbing from $18 to $29. Netflix dropped almost 60%, falling from $178 to $72.

This is not to suggest that Blockbuster accounts for Dish's rise in 2011. Satellite TV is its cash-generating engine, and Blockbuster is a speculative play. Kraft says there are a number of reasons for Dish's gains. First, investors had low expectations for Dish at the start of 2011. The company reached a settlement on a lawsuit brought by TiVo Inc. that was more lenient than anticipated. The stock rose to reflect the value of wireless spectrum licenses it owns or is acquiring.

Ergen's playbook stands to become more complex because of the spectrum deals. Dish is paying $2.9 billion, collectively, for bankrupt communications providers DBSD North America Inc. and TerreStar Networks Inc., which have portfolios of wireless licenses. The company had previously bought licenses in a government spectrum auction.

With the range of deals that Ergen pursued in 2011, his faith in satellite TV comes into question. Ergen contributed to the uncertainty in a February 2011 call when he compared the business to landline phone service as mobile phones began to change the economics of telecom. "I'd rather be on the leading edge of that than the back end of it," he said.

Both the Blockbuster and spectrum deals may be a realization that, as pay TV reaches 85% of households, satellite faces limited growth. "You have a mature industry, and Charlie Ergen clearly knows that," Kraft says. For Ergen, who delivered dishes to rural Colorado in the '80s, there's more tinkering to do.