DISH Should Soon Move To Merge With Sprint Or T-Mobile

Aug.11.14 | About: DISH Network (DISH)

Summary

Sprint has been attempting to acquire T-Mobile, but just gave up on that endeavor.

DISH wanted to buy Sprint or its spectrum and such a deal now makes more sense, given AT&T's move to acquire DirecTV.

Since DISH last attempted to acquire Sprint, DISH's mart valuation has increased by about 65%, indicating it is far more capable of buying Sprint now.

If DISH cannot work with Sprint, it could move to buy T-Mobile, but a Sprint merger now appears a cheaper and more viable option than ever before for DISH.

SoftBank's (OTCPK:SFTBY) ambitious move into the U.S. market hit a major apparent setback last week, when Sprint (NYSE:S) backed out of its bid to acquire T-Mobile (NASDAQ:TMUS). Sprint must now regroup and formulate a new plan for its continued competitiveness in an industry that is dominated by two far larger entities: AT&T (NYSE:T) and Verizon (NYSE:VZ).

While its plan to combine with T-Mobile is over, it may be time for Sprint to combine with DISH Network (NASDAQ:DISH) in a merger that would benefit both entities. Further, such a transaction is far more likely to be approved by the FCC and DOJ. Recently, AT&T made a bid for DirecTV (DTV), which appears to be a comparable merger between a satellite company and a telecom provider, though far larger of both. If that deal is capable of receiving regulatory approval, a merger between Sprint and DISH should also qualify.

SoftBank has been Japan's leading seller of smartphones since 2007. SoftBank gained most of its Japanese market share by having an exclusivity contract with Apple (NASDAQ:AAPL) for the iPhone. SoftBank enjoyed iPhone exclusivity several years, much like how AT&T had iPhone exclusivity in the United States for the first few years. Additionally, SoftBank lured customers by offering more data options for smartphones, tablets, laptops and vehicles. SoftBank had hopes of having similar success in the United States with Sprint and/or a combination of Sprint and T-Mobile.

DISH has had plans to enter the mobile data market for a while, and those plans have often involved Sprint. In particular, DISH competed with Sprint on its bid to purchase Clearwire. Sprint was a majority owner of Clearwire in advance of SoftBank's majority acquisition of the carrier, and announced plans to absorb Clearwire shortly after SoftBank completed the transaction. DISH stepped in and bid to buy about one quarter of Clearwire's spectrum for about $2.2 billion.

When DISH bid for that Clearwire spectrum, it seemed DISH might be better off further consolidating with Sprint and SoftBank. It appeared to be a sensible plan, because DISH wanted a wireless company, and obtaining a sizable interest in Sprint and/or SoftBank seemed to be an easier way than attempting to develop a new competitor from scratch. There was some prior dialog between Sprint and DISH. The companies had discussed the possibility of Sprint hosting DISH's wireless spectrum on Sprint's mobile towers, but the deal subsequently fell apart. DISH then made a failed attempt to acquire MetroPCS for about $4 billion.

After it became apparent that Sprint would acquire Clearwire, DISH offered to buy Sprint for $25.5 billion in cash and stock. DISH's proposed deal includes the intention to fund the $17.3 billion cash portion of its $25.5 billion offer by using $8.2 billion in balance sheet cash and raising $9 billion in additional debt financing. The company had some issues obtaining sufficient financing, but largely because SoftBank implied to investment banks that financing DISH would preclude their participation in the Alibaba IPO, where SoftBank is a substantial shareholder.

Now, DISH has far more purchasing power, though the troubled situation in which Sprint finds itself may mean that DISH does not need much more, if any. DISH shares have appreciated by about 65% since it made that $25.5 billion deal in April of 2013, which should provide it with the ability to use equity more easily. Moreover, SoftBank is unlikely to prevent DISH from obtaining deal financing this time, and may actually want to help.

Given Sprint's substantial decline in the wake of its backing away from T-Mobile, DISH may want to quickly move to enter some sort of merger or joint venture before Sprint goes in another direction. If it is disinterested in joining with Sprint, it may prefer to acquire T-Mobile. It is likely that DISH will go in the direction that gets it the most spectrum for the money. In addition to the spectrum providers already have, there will be spectrum coming available to the market in an upcoming auction.

DISH may also get approached by a carrier or related data provider like AT&T did with DirecTV, though such a deal with Verizon would be relatively unlikely until the FCC and DOJ voice their opinion of such deals. It appears likely that both agencies will continue to occasionally restrict consolidation of assets into AT&T and Verizon, and possibly including both carriers and spectrum. All of this activity should bode well for Sprint and TMUS valuations from this recently deteriorated level to the other side of the spectrum auctions, and any positive news in the interim should help.

I believe a Sprint b id is most likely, because of its significant spectrum and DISH's prior interest and familiarity with the entity. Moreover, a deal with Sprint could create a larger domestic entity that still has access to SoftBank's deep pockets, credit and culture of buying. As a result, it appears likely that later this year or in 2015, DISH will maneuver to merge with Sprint, or to enter some joint venture that combines their spectrum and capabilities within the increasingly competitive business of data transmission.

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