FCC Cancelling Dish’s Auction Discount Would Lead To A 9% Correction In Our Price Estimate

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According to recent reports in the Wall Street Journal, the FCC is set to reject the $3.3 billion in discounts that Dish Network (NASDAQ:DISH) received in the AWS-3 auction. The commission feels that Dish’s bidding partners do not qualify for the small business discount. If the FCC cancels the discount, Dish will owe the commission the disputed amount, effectively increasing the company’s liabilities. Subsequently, Dish’s Net Debt for our price estimate calculations will effectively increase from $12.6 billion ($27.27 per share) to $15.9 billion ($34.41 per share). As a result, our new price estimate for Dish would be $72.37, implying a correction of 9% to our current price estimate of $79.8.

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The issue of the discount received by Dish became prominent after the company acquired 25 MHz of AWS-3 wireless spectrum in the 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/discount of 25% (Approximately $3.3 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] The FCC subsequently took notice and stated that it will conduct a review of all winners to ensure eligibility compliance as well as look into the discounts meant for small businesses. [2] [5]

Now the Wall Street Journal is reporting that the FCC is poised to cancel the discount as the commission feels that Dish’s bidding partners do not qualify for the small business discount. [6] Additionally, Dish’s actions have also prompted the FCC to review its auction policies. FCC commissioner Tom Wheeler recently proposed certain changes to the current spectrum auction policies in order to ensure that no large business house can take advantage of the system in the future. (Related – Dish Might Find It Harder To Acquire Future Spectrum, Limiting Stock’s Potential Upside) It needs to be noted that the FCC has made no official announcement regarding cancelling the discount and Dish will also have the legal right to challenge such a decision. Hence, it cannot be claimed with certainty that Dish will have to pay up. However, the regulator has repeatedly condemned Dish’s tactics in the past so there is a good chance that the discount will be cancelled.

Effect On Dish’s Stock Price

If the FCC cancels the discount Dish received during the auction, the company will have to pay an additional $3.3 billion to the commission. This would essentially be an addition to the company’s liabilities and would increase our projections of the company’s Net Debt (Total Debt – Cash & Cash Equivalents). In our current price estimate calculations, we have used reported Net Debt of $12.6 billion ($27.27 per share) which gives us a price estimate of $79.50 for Dish. If the FCC cancels the discount, the Net Debt for our calculations will effectively increase by $3.3 billion, amounting to $15.9 billion ($34.41 per share). The increase in net debt will reduce the present value of total cash flows available to the company’s stakeholders. Consequently, our new price estimate for Dish would be $72.37, implying a correction of 9% to our current estimate.

The additional liability could also effect Dish’s plans to bid for spectrum at future auctions. As the FCC is almost certain to scrap the small business bidding credit rule, the company will now have to compete on an equal footing with cash-rich companies such as AT&T and Verizon and could find it difficult to mobilize finances. Dish’s ability to spend is already 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. [7]  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. Paying up more than $3 billion to the FCC at this point will only hurt Dish’s chances of acquiring meaningful spectrum at next year’s incentive auction and beyond.

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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. FCC to Address Small-Business Discounts in Spectrum Auction, March 18, 2015, Wall Street Journal []
  6. FCC Poised to Reject Dish Partners’ Spectrum Discounts, July 16, 2015, Wall Street Journal []
  7. Dish Network’s SEC Fillings []