Could T-Mobile Ditch Dish Network For Comcast?

June 22nd, 2015 by Trefis Team
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The pay-TV and telecom industries are rife with speculation at the moment. The Wall Street journal recently reported that Dish Network (NASDAQ:DISH) was in talks with T-Mobile (NYSE:TMUS) about a merger. [1] The report stated that both sides were in broad agreement over the structure of the combined entity, but other major details such as purchase price and cash-stock mix were still unresolved (related – Merger With T-Mobile The Right Step, But Dish Needs To Speed Things Along). Dish seems fairly interested in moving forward and reportedly held talks with banks regarding the money it needed to raise to fund the acquisition. [2] On the other hand, T-Mobile’s biggest shareholder, Deutsche Telekom, doesn’t seem as keen on this deal. Deutsche Telekom Chief executive Timotheus Höttges reportedly stated that he favors Comcast (NASDAQ:CMCSA) over Dish as a potential partner for T-Mobile. [3] Further reports of Comcast engaging in talks with Deutsche Telekom regarding a potential sale have also added fuel to the fire that Comcast might be a genuine contender for T-Mobile. [4] As if on cue, reports citing a source who is familiar with the situation also surfaced claiming that Comcast is not interested in buying T-Mobile. [5] Comcast, for its part, has not made its intentions clear and has remained silent on the situation.

Comcast could have a strong incentive to acquire T-Mobile, as an assimilation of T-Mobile’s operations would add wireless services to Comcast’s business, allowing the company to offer a quadruple-play bundle. This could help Comcast compete effectively with the proposed AT&T-DirecTV combination in a market where the boundaries between wireless and cable/online video are blurring.

Our price target for Comcast stands at $62, implying a premium of around 10% to the market.

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See our complete analysis for Comcast

Comcast Performance Update

Comcast is the largest U.S. cable operator, providing consumers and businesses with pay-TV, high-speed internet and digital voice (VoIP) services, usually in triple-play packages. The company has about 22.4 million pay-TV subscribers and 22.4 million high-speed internet subscribers as of March 31, 2015. [6] Additionally, the company also operates NBCUniversal, which owns the NBC and Telemundo broadcast networks, cable channels such as USA Network, E!, CNBC, MSNBC, Syfy and Bravo, film studio Universal Studios and theme park business Universal Parks and Resorts.

The high-speed Internet business has performed exceedingly well for Comcast due to rising demand for faster Internet and a corresponding decline in DSL Internet connections. The segment’s subscriber base increased from 13 million subscribers in 2007 to almost 22 million by the end of 2014. [7] Comcast is also operating in the stagnant pay-TV industry, which has lost nearly 3 million subscribers in the last two years. [8] [9] This can be attributed to a combination of factors such as market saturation, fierce competition and the rise of alternative video platforms such as Netflix (NASDAQ:NFLX) and Hulu. However, Comcast has managed to slow the pace of subscriber losses in recent quarters, primarily due to its triple play bundling, which combines pay-TV, high speed internet and voice into one package. This bundling helps reduce subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale.

Why Comcast Could Be Interested In T-Mobile

Notwithstanding its recent strong performance in the pay-TV and high-speed internet market, Comcast will be at a disadvantage if the proposed AT&T-DirecTV merger goes through. The AT&T-DirecTV combo will be able to offer four bundled services (mobile, fixed-line, high-speed internet and TV) as compared to the three offered by Comcast. Comcast could respond to this competition by reducing its subscription fees. However, this seems highly unlikely as the pay-TV industry is already suffering from a steady loss of subscribers and a reduction in subscription fee would result in a one-two punch combination that will significantly erode revenues.

Another option for the cable major is entering the wireless industry and upgrading its triple-play offerings to quadruple-play bundles. Comcast could consider entering into a partnership with either T-Mobile or Sprint, or even buying out one of these two wireless carriers. T-Mobile may be the better choice of the two, as it boasts a faster-growing wireless subscriber base, which grew by 8.3 million in 2014. [10] By comparison, Sprint added slightly less than 2.6 million subscribers in its last full year ended March 31st, 2015. [11] T-Mobile was also able to increase its profits from $35 million in 2013 to $247 million last year, while Sprint’s losses widened year-over-year from $2 billion to $3.3 billion. [12] [13]

Why Merger With Comcast Makes Sense For T-Mobile

Dish paid out around $8.7 billion in AWS-3 FCC license deposits last quarter and has around $14.4 billion of debt on its balance sheet. [14] This will severely weaken Dish’s ability to pay cash for the T-Mobile deal, resulting in a larger stock component. This is one of the primary reasons why Deutsche Telekom is not in favor of selling to Dish, as it is looking for a larger cash component. Comcast’s Free Cash Flows for 2014 amounted to $8.4 billion [15] and it had $3.9 billion in cash and cash equivalents on its balance sheet as of March 31, 2015, giving the company enough firepower to better satisfy Deutsche Telekom’s demands. ((Comcast’s SEC Fillings)) In terms of market cap, Comcast is around 4.6x more valuable than T-Mobile. Comcast’s deep pockets will also come in handy for T-Mobile going into the FCC’s incentive auction of 600 MHz broadcast TV spectrum next year. T-Mobile is currently lobbying the FCC to increase the size of the spectrum reserve for the auction, arguing that bigger players such as AT&T and Verizon will continue to dominate the wireless industry if the smaller players are starved of the required spectrum. [16] Whether or not T-Mobile’s request is approved, having Comcast in its corner would allow the company to better compete with the big two when bidding for spectrum at next year’s auction.

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Notes:
  1. Dish Network in Merger Talks With T-Mobile, WSJ, June 4 2015 [↩]
  2. Dish Network in Talks with Banks About Funding T-Mobile Bid, June 11, 2015, Wall Street Journal [↩]
  3. T-Mobile’s biggest shareholder not interested in Dish merger, June 8, 2015, New York Post [↩]
  4. Deutsche Telekom talks to Comcast about T-Mobile US sale: Manager Magazin, June 17, 2015, Reuters [↩]
  5. UPDATE 1-Comcast not interested in buying T-Mobile -source, June 17, 2015, Reuters [↩]
  6. Comcast’s SEC Fillings [↩]
  7. Comcast’s SEC Filings [↩]
  8. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
  9. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 03, 2015, Leichtman Research Group [↩]
  10. T-Mobile US Reports Fourth Quarter and Full-Year 2014 Results, T-Mobile Press Release [↩]
  11. SPRINT REPORTS RESULTS FOR FOURTH FISCAL QUARTER OF 2014, Sprint News Release [↩]
  12. T-Mobile’s SEC Fillings [↩]
  13. Sprint’s SEC Fillings [↩]
  14. Dish Network’s SEC Fillings [↩]
  15. Comcast Corp (NAS:CMCSA) Free Cash Flow, gurufocus [↩]
  16. T-Mobile keeps lobbying FCC to increase size of 600 MHz reserve, June 4, 2015, FierceWireless [↩]