Dish Might Find It Harder To Acquire Future Spectrum, Limiting Stock’s Potential Upside

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Dish Network (NASDAQ:DISH) has made significant investments in spectrum over the past few years and currently owns licenses to more than 80 MHz of spectrum. We estimate that Dish’s spectrum holdings have a pre-tax fair value of around $39 billion and constitute 61% of Dish’s stock value. However, Dish might find it relatively difficult to acquire spectrum in future FCC auctions, once the FCC Chairman Tom Wheeler’s proposed changes to current spectrum auction policies are approved. Wheeler is bringing in greater transparency and a cap on bidding credits with regards to the small businesses program, the same program Dish effectively used in the last auction to secure a discount of nearly $3 billion. As a result, Dish will now have to compete on equal footing with cash-rich AT&T and Verizon and will find it difficult to mobilize finances. As any amount of spectrum acquired by Dish adds to the company’s overall valuation, this development will limit the stock’s potential for upside surprises.

Our price estimate for Dish stands at $79.8, implying a premium of about 15% to the market.

See our complete analysis for Dish Network

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FCC Chairman Wheeler recently stated that that he is proposing certain changes to the current spectrum auction policies. He is advocating greater transparency and efficiency with regards to small businesses in order to prevent potential gaming or abuse. He is also proposing a cap on the total value of bidding credits available to these designated entities, a step he believes will help in “minimizing an incentive for major corporations to try to take advantage of the program.” Wheeler’s draft of the revised rules has been circulated to other commissioners ahead of the FCC’s next open meeting, with a vote on the rules scheduled for the meeting itself.

The issues of small businesses and bidding credits became prominent after Dish acquired 25 MHz of AWS-3 wireless spectrum in an FCC auction which concluded on January 29, 2015. [1] The company spent close to $10 billion at the auction, but also received a bidding credit of 25% (Approximately $3 billion) as it bid through small partners SNR and Northstar. However, the credit did not go down well with others. FCC commissioner Ajit Pai said that the discount “makes a mockery” of the program and requested an investigation into Dish’s tactics. [2] Rival carriers AT&T (NYSE:T) and Verizon (NYSE: VZ) accused Dish of distorting prices during the auction. [2] [3] Dish on its part claimed that it operated within the guidelines and did not distort prices. [4] As a result of Dish’s actions, the FCC is now set on making changes to the bidding policies in order to ensure that no large business house can take advantage of the system in the future. We believe that the proposed changes will be approved, which means that Dish will not be able to buy spectrum at a discount through its small business partners in the future.

Wheeler also seems content with the current size of the spectrum kept in reserve in next year’s Incentive Auction. Currently, 30 MHz of spectrum will be kept apart for bidders that do not currently hold significant amounts of low-band spectrum. This is another setback to Dish as the company has been lobbying the FCC to increase the size of the spectrum reserve to 40 MHz, arguing that AT&T and Verizon will continue to dominate the wireless industry if the smaller players are starved of the required spectrum. [5]

How Dish Will Be Impacted

These developments will put a dampener on Dish’s plans to bid for spectrum at future auctions. The company will now have to compete on an equal footing with cash-rich companies such as AT&T and Verizon and will find it difficult to mobilize finances. Dish’s ability to spend will also be severely weakened by the fact that it 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. [6] Dish might be able to pool resources with T-Mobile if their merger goes through but the merger itself will be a big drain on Dish’s cash resources. T-Mobile’s current market capitalization is around $31 billion and, as T-Mobile’s biggest shareholder Deutsche Telekom is looking for a larger cash component, Dish will have to pay out the majority of the acquisition consideration in cash. All this leads us to conclude that once these changes come into effect, Dish will find it relatively harder to acquire more spectrum. We price the current value of Dish’s spectrum holdings into its stock price. Consequently, any increase in Dish’s spectrum holdings eventually results in an increase in our price estimate for the company. As Dish will now find it relatively hard to secure future spectrum, this effectively reduces the potential for upside surprises on the stock.

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Notes:
  1. AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, January 30, 2015, Fierce Wireless []
  2. AT&T Says Dish’s Tactics Distorted Spectrum Auction, February 20, 2015, Wall Street Journal [] []
  3. Verizon Says Dish Bidding Tactic Distorted FCC Spectrum Auction, February 27, 2015, Wall Street Journal []
  4. Dish Chairman Ergen Defends Strategy in FCC Airwave Auction, February 23, 2015, Wall Street Journal []
  5. T-Mobile, Sprint and Dish push for 40 MHz spectrum reserve in 600 MHz auction, March 25, 2015, FierceWireless []
  6. Dish Network’s SEC Fillings []