Why EchoStar Stock Crashed 18% Today

So it seems that the rumors were true.

Two weeks after Bloomberg broke the story that the on-again, off-again merger between EchoStar (NASDAQ: SATS) and DirecTV might be on again, EchoStar this morning announced a "suite of transformative transactions to delever its balance sheet and improve its debt maturity profile."

Investors are unimpressed. EchoStar stock fell 18.5% through 10:15 a.m. ET on the news.

How the Dish-DirecTV merger will work

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

Additionally, 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 cash to build out "its Boost Mobile nationwide 5G Open RAN network," making itself much more of a pure-play cellphone company.

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

What does this mean for EchoStar shareholders?

Long story short, EchoStar is getting out of the satellite TV business, while DirecTV is wading deeper in. While the intricacies of EchoStar's "suite of transformative transactions" are confusing, the upshot appears to be this:

EchoStar is currently unprofitable, and laden with $25.3 billion in debt against only $520 million in cash. By selling Dish and Sling to DirecTV, it will lighten its debt load, lower its interest payments, and get closer to profitability. The company is also rolling over its debt and pushing it a few years down the road, while taking on more debt and selling more shares to raise cash.

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

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.