Why DISH Network Might Be Considering a Big Merger

By Brian Nichols | More Articles | Save For Later
November 26, 2014 | Comments (0)

DISH Network's (NASDAQ: DISH ) stock traded higher by a whopping 13% as the early success from the FCC's Auction 97 spectrum sale significantly increased the company's valuation. Investors might assume that DISH Network will now attempt to sell its AWS-4 spectrum -- which some estimate to be worth $20 billion -- to an eager telecom giant. However, there is another possible scenario, one that might be just as likely, if not more so.

Options galore for DISH Network
Currently, the FCC is auctioning its largest block of spectrum since 2008, and already, the FCC has earned proceeds of $24 billion in winning bids. This is a big deal because the FCC's goal was to create $10 billion throughout the entire auction process, which still has about three weeks remaining. As a result of this surprising demand, the value of spectrum assets has risen. That especially applies to DISH Network.

The FCC cleared DISH Network's airwaves for mobile and 4G use back in 2012, which gave DISH Network a spectrum asset valued north of $12 billion. But thanks to the success of Auction 97, DISH's spectrum is now valued north of $20 billion by some estimates.

Many investors believe that DISH Network will attempt to cash in on its asset and sell it to a telecom giant. After all, DISH Network was given a deadline to have 40% of its spectrum connected to mobile devices by 2017 when it was approved for mobile use. As of now, DISH Network has no mobile network, hence, DISH needs to strike while the iron is hot.

However, there is another option other than a sale of its spectrum. DISH Network management might want to acquire or partner with one of the four nationwide wireless service providers.

DISH's history implies wireless interest
First off, for a little history refresher: DISH Network made a $25.5 billion bid to acquire Sprint (NYSE: S ) before Softbank ultimately completed its acquisition. Then, when Sprint bid to acquire Clearwire, DISH Network tried to intervene.

DISH not only made a bid for Clearwire but also pleaded with the FCC to block the buyout by Sprint. At the time, Softbank hadn't completed its acquisition of Sprint, and there was a belief among analysts that Softbank wanted Sprint only if it came with Clearwire's spectrum. Softbank ultimately won this war against DISH and Sprint acquired Clearwire.

Therefore, DISH Network has shown interest in the past in acquiring a wireless service provider, which would combine spectrum assets and create a far better data usage experience for the combined company. That said, the best choice for either an acquisition or partnership looks to be T-Mobile (NYSE: TMUS ) .

Why T-Mobile?
First off, AT&T (NYSE: T ) is in the process of acquiring DirecTV (NASDAQ: DTV ) . Therefore, AT&T would have little need for DISH Network beyond spectrum. Furthermore, with AT&T moving into Mexico and DirecTV owning spectrum assets in Latin America, it appears that AT&T's DirecTV acquisition is an emerging-markets investment.

Assuming that Verizon (NYSE: VZ ) has shared interests to enter Mexico and Latin America, DISH Network would not fit that cause. Not to mention that DISH would be a difficult acquisition for Verizon, given the $130 billion that Verizon spent last year to acquire its remaining wireless business. Lastly, Sprint is already owned by Softbank and owns Clearwire's spectrum, making it an unlikely partner for Dish Network.

This leaves T-Mobile. DISH Network Chairman Charlie Ergen did say back in May that "T-Mobile would have strategic interest to us" if regulators blocked the deal between T-Mobile and Sprint. Furthermore, T-Mobile is a company that embraces a potential merger, having been involved in failed attempts with AT&T and Sprint.

Back in June, T-Mobile CEO John Legere said that the wireless industry is a "scale game" and that Verizon and AT&T are "hugely more powerful from a standpoint of scale and capital." Legere said he believes that T-Mobile can be "highly successful as a stand-alone company," but that a deal could accelerate growth. T-Mobile and DISH appear to be companies that could be willing to merge.

Furthermore, with T-Mobile's stock price falling 15% over the past six months, DISH Network now has the opportunity to make a bid at an attractive price.

Something else to consider
While T-Mobile wouldn't double its wireless service subscribers by merging with DISH, it would gain 14 million pay-TV subscribers and a way to combat the services of AT&T and DirecTV. Meanwhile, DISH Network would gain a growing wireless service provider, one that's gained at least 1.5 million net new subscribers in each of the past six quarters. Finally, the merger would create a much more efficient spectrum network, making T-Mobile's 4G network even more reliable for users.

It is possible that DISH Network will auction its spectrum in exchange for cash and capitalize on the demand. However, given Ergen's past interest in wireless service providers, his comments about T-Mobile, and Legere's history of attempted mergers, the more likely scenario is that T-Mobile and DISH Network hold serious conversations about merging

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.
http://www.fool.com/investing/gener...etwork-might-be-considering-a-big-merger.aspx