Late last Wednesday afternoon, news hit the tape that Dish Network (DISH) would end its pursuit for Clearwire (CLWR), paving the way for Sprint (S) to assume full control of the company for $5 per share (in line with our fair value estimate).
Although we thought as well as the market thought (since shares of Clearwire were trading above the Sprint buyout price prior to the withdrawal) that Dish Chairman and founder Charlie Ergen would make a higher offer for Clearwire, Ergen may have known a bit more than he led onto during the bidding process, given that the FCC just approved draft rules for the auction of additional spectrum one day after his pursuit for Clearwire ended. Obama seems intent on freeing up as much spectrum as possible for private use, and while motivations behind this move matter much less than the possible implications, we believe this could allow Dish to pursue other less-costly means of accumulating spectrum.
We note, however, that it's still very possible that Dish could pursue a smaller wireless acquisition to gain some industry expertise and an existing customer base. T-Mobile (TMUS) seems to be the favorite candidate at this point, especially since it seems like a formidable fourth foe in the wireless market. Clearwire likely became a much less attractive option when Dish realized it had little chance of merging with Sprint and its established mobile business.
Dish could also go after the nation's sixth-largest cellular provider, US Cellular (USM) and its parent (80% owner), TDS Telecommunications (TDS). Such a deal would require substantially less capital than a merger with Sprint and would give Dish an existing mobile provider as well as an internet provider. Dish, however, may have trouble clearing regulatory hurdles since TDS runs a cable business. Still, it wouldn't be unlike Ergen to push for a deal that could boldly transform his company.
As for Sprint/Clearwire, we like the deal with SoftBank, even though the cash portion of the deal is lower than the original proposal. SoftBank's expertise in network build-outs and superior cash position make it more likely that Sprint will be able to compete with Verizon (VZ) and AT&T (T), in our view.
We applaud Dish for making an aggressive offer for both Sprint and Clearwire, but ultimately, the firm walked away empty handed. Dish didn't quite have the firepower to get a deal done, but that does not mean that Dish will not try to diversify its business model in the future. Dish could undergo a major transformation in the next year.
Nevertheless, we see no reason to establish a position in Dish at this point. Not only do we believe shares look fairly valued, but we already hold shares of competitor DirecTV (DTV) in the portfolio of our Best Ideas Newsletter.