Dish’s Bid For Sprint Is Risky But Could Strengthen Hand With Triple-Play Bundles

The ongoing consolidation in the wireless industry took a dramatic twist Monday with Dish Network (NYSE:DISH) announcing that it has submitted a $25.5 billion counter bid to buy Sprint (NYSE:S). The announcement creates an interesting two-way tussle for Sprint, with Japanese telecom company Softbank having already made a $20.1 billion offer for 70% of Sprint. Dish said that its counter offer, which values Sprint at about $7 a share, is about 13% higher than Softbank’s bid and will bring greater synergies to the partnership. The pay-TV operator’s wireless ambitions have always been known, but the scale of its latest move suggests that it may even be willing to enter into a bidding war with Softbank.

Sprint’s shares have shot up almost 14% on the news and are trading slightly above Dish’s bid price on anticipation that Softbank will put forward a higher bid in response. However, the fact that the Japanese Yen has declined almost 20% since October last year would make an improved bid that much costlier for Softbank (unless Softbank has hedged additional capital anticipating a higher bid).

A Dish-Sprint merger may also find favor with the regulatory bodies since it doesn’t involve a foreign buyer. From a purely competitive standpoint as well, Dish acquiring Sprint would create an entity with over 60 million retail subscribers and $50 billion in revenues, helping it better compete with wireless behemoths Verizon and AT&T. However, it would create a highly leveraged company with over $40 billion in debt, servicing which could prove to be an issue with a combined EBITDA of only about $10 billion.

See Full Analysis of Sprint | Dish Here

Marketing bundled services

Dish’s motivation behind entering the wireless market is mostly driven by the need to diversify its business away from a sluggish pay-TV market. With mobile data usage on the rise, driven by the proliferation of mobile devices such as smartphones and tablets and the ongoing transition to high-speed 4G LTE networks, Dish wants to be able to bundle wireless services with its pay-TV and broadband services in order to better serve customers. The trend towards triple-play bundles was set in motion last year when Verizon signed co-marketing deals with cable companies Time Warner Cable, Comcast and Cox to promote each other’s services in their respective stores. Dish doesn’t want to be left behind as these trends take root. It is in fact taking it a step further by looking to market all these services under a single brand at a national level, instead of hedging its bets by just partnering with a carrier.

Such a move however changes little from a customer’s perspective, aside from the obvious convenience of having to pay just a single bill for all the services. It will be tough for Dish to realize synergies out of running a wireless mobile network and a satellite home service together, and hence little by way of cost savings can be passed on to the customers. On the other hand, a Softbank deal will give Sprint the ability to negotiate better terms with handset makers such as Apple and Samsung. Lower subsides will help Sprint offer customers more competitive rates on its wireless plans without taking a hit on its margins.

Cash infusion paves way for Clearwire acquisition

As far as Sprint is concerned, either deal will give it enough cash to implement its Network Vision plan and be more aggressive in laying out its next-generation 4G LTE network. Both Softbank and Dish will also want Sprint to acquire Clearwire completely, which should give Sprint enough nationwide spectrum to provide superior data and voice services as the industry moves towards an all-LTE standard. In fact, we see Dish’s aggressive bid on Sprint to have been prompted by Clearwire’s acceptance of a second monthly financing from its majority shareholder Sprint, which made pursuing Clearwire all the more futile for Dish. (see Clearwire Rebuffs Dish By Accepting Second Monthly Financing From Sprint)

Acquiring Clearwire will give Sprint access to its vast swathe of 2GHz spectrum, which would go a long way in bolstering its LTE network. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average. Moreover, the two companies already have a deal in place, according to which Sprint will be able to offload 4G LTE traffic onto Clearwire’s planned TD-LTE network. Additionally, Clearwire’s spectrum will enable Sprint to lower its long-term CapEx spend on capacity increases following the initial deployment phase which is seeing burgeoning investments on LTE. Sprint is highly sensitive to CapEx increases, which can be seen by moving the trend line in the forecast chart below and following the corresponding impact on its price estimate. Additional spectrum capacity will go a long way in bringing these costs down.

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