Monday morning, satellite TV provider Dish Network (DISH) made a bold offer to merge with the United States' third largest cellular carrier, Sprint (S). The deal represents a valuation premium to SoftBank's $20.1 billion offer for 70% of shares, and we believe Sprint's board must consider the superior offer, which equates to $4.76 per share in cash and $2.24 per share in Dish stock, valuing Sprint at $25.5 billion.
CEO Charlie Ergen is no stranger to bold moves, and many believe he's had his eye on Sprint for a some time. Although we thought a DirecTV (DTV) merger was more likely to occur, the Sprint deal makes a lot of sense for shareholders of both companies if Ergen's plan succeeds. Under a merger, Dish would have access to Sprint's wireless spectrum and presumably the spectrum of Clearwire (CLWR) to offer nationwide internet service, TV, and voice services. Dish could use its strong cash flow from its own satellite TV business to upgrade Sprint's network. The combined entity could provide a compelling "triple-play" offer like competitors AT&T (T) and Verizon (VZ).
Further, Ergen argues a Sprint/Dish merger could result in $11 billion in cost savings, and it would eliminate the need for duplicate capital expenditures on spectrum. The combined entity would also give existing Sprint shareholders a 32% economic interest in the new company compared with a 30% interest in Sprint under the SoftBank deal. Under existing terms, it is also likely that Sprint's acquisition of Clearwire for $2.97 per share would be completed. Overall, it seems that Clearwire shareholders are the only group worse off than under the SoftBank deal.
Ergen's proposal would create an intriguing company, in our view. Sprint subscribers could (theoretically) have access to Dish Network's existing content partners for mobile streaming in a time when mobile video is becoming increasingly more important to consumers. We believe Dish could also branch out into creating its own content, making exclusive content a possible selling point for retaining/attracting customers.
Ultimately, it's too early to tell if a deal will consummate, and we must not forget SoftBank will have an opportunity to sweeten its offer. With Ergen's reputation of being a stickler for costs, a merger could result in a different corporate culture at Sprint. The board may not like a change, and we believe the board will do everything in its power to help SoftBank close a deal because merger talks between the two firms were consensual, whereas Dish's offer is hostile. We're interested in seeing how the deal plays out, but we have no position at this time.