With T-Mobile Deal Dead In The Water, Dish Could Lease Spectrum To Verizon

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Dish Network (NASDAQ:DISH) is reported to have had talks with Verizon (NYSE:VZ) regarding a partnership which could lead to Verizon using Dish’s spectrum in exchange for providing Dish with wireless capacity. Dish was earlier in discussions with T-Mobile (NYSE:TMUS) about a possible acquisition, but the recent cancellation of Dish’s $3.3 billion spectrum discount by the FCC put a wrench in those plans. Dish’s ability to spend was already limited, and an additional liability of that magnitude will make any significant M&A difficult to pull off. Consequently, Dish could lease out its spectrum to Verizon as this will help the company in monetizing its unused spectrum and will also result in some much needed cash inflows. Additionally, the wireless capacity that Dish could receive from Verizon could enable the satellite-TV provider to bundle Verizon’s services with its pay-TV packages.

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Dish Could Lease Out Spectrum To Verizon

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Verizon CEO Lowell McAdam recently claimed that the telecom giant has had talks with Dish regarding monetization of Dish’s spectrum holdings. [1] He further stated that the two companies had talked about a partnership which could lead to Verizon using Dish’s spectrum in exchange for providing Dish with wireless capacity. Dish was earlier in talks with T-Mobile regarding a possible merger, but the negotiations came to a standstill once the FCC decided to cancel the $3.3 billion discount that Dish received during Auction 97. [2] Dish’s ability to spend is already severely weakened, as it dished out $8.7 billion in AWS-3 FCC license deposits earlier in the year and has around $13.8 billion of debt on its balance sheet. [3] The additional liability of $3.3 billion effectively eliminated the potential T-Mobile merger. T-Mobile CEO John Legere recently stated that there was “absolutely no communication” happening between the two companies. [1] Regarding the T-Mobile deal, Dish CEO Charlie Ergen stated on the last earnings call that “from our perspective, the discount was the most complicating factor.” He further stated that such a liability would complicate any other future M&A plans. [4]

This leads us to believe that with any sort of M&A likely out of the picture, Dish could welcome the chance to lease out its spectrum. A deal with Verizon will help the company monetize its unused spectrum and will also result in some much-needed cash inflows. Additionally, the wireless capacity that Dish could receive from Verizon could enable the satellite-TV provider to operate as a mobile virtual network operator (MVNO) and bundle Verizon’s services with its pay-TV packages. However, the companies likely need to complete any deal quickly. The FCC will soon impose a “quiet period” that forbids negotiations over spectrum negotiations in advance of the upcoming 600 MHz spectrum incentive auction, which is scheduled for March 29, 2016.

Other Less Likely Options For A Verizon-Dish Deal

Verizon could potentially go for an outright acquisition of Dish. That would enable the telecom giant to better compete with the newly created AT&T (NYSE:T)-DirecTV entity, as Verizon would also be able to absorb Dish’s pay-TV subscribers. However, Verizon’s management has gone on record on multiple occasions stating that they have no intention of buying Dish. [5]

Another option for Dish would be to just sell its spectrum holdings to Verizon. As far as Dish is concerned, a spectrum sale would boost the company’s cash balance. However, it would leave the company operating in a saturated pay-TV market with no other major avenues for growth. Other pay-TV operators have alternative growth engines: Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) have high-speed internet segments, while Dish’s rival DirecTV has merged with telecom giant AT&T in order to provide more efficient bundled services. Even before the merger with AT&T, DirecTV was more diversified in comparison to Dish as it had a significant presence in the Latin American market. The U.S. pay-TV market is saturated, with pay-TV penetration currently at around 83% of all TV households. [6] Given the saturation level and the sluggishness in the housing market, we are unlikely to see a significant increase in the number of U.S. pay-TV subscribers. Additionally, alternative video platforms such as Netflix (NASDAQ:NFLX) are adding to the woes of pay-TV operators. Accordingly, selling the spectrum might not be the best idea for Dish in the long term.

Time Is Running Out For Dish To Make A Move

Dish’s spectrum licenses are subject to certain interim and final build-out requirements by the Federal Communications Commission (FCC). Dish must provide reliable signal coverage and offer service to at least 40% and 70% of the population in each area covered by the AWS-4 licenses by March 2017 and March 2021, respectively. [7] Dish’s license authorization can be terminated in each area it fails to meet these build-out requirements. However, Dish has not even begun building out its coverage in any of these areas as of now. Assuming Dish does not get an extension from the FCC, the company has roughly one and a half years to put its spectrum to use. If Dish fails to meet the buildout requirements, there could come a time when the FCC clock runs out for Dish. In that scenario, the company might have to sell at a huge discount or, even worse, completely relinquish the spectrum to the FCC.

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Notes:
  1. What Telecom CEOs Are Saying: Highlights from Goldman Sachs Conference, September 18, 2015, Wall Street Journal [] []
  2. FCC Votes to Deny $3.3 Billion in Discounts Sought by Dish Network, August 17, 2015, Wall Street Journal []
  3. Dish Network’s SEC Fillings []
  4. DISH Network (DISH) Charles William Ergen on Q2 2015 Results – Earnings Call Transcript, August 5, 2015, Seeking Alpha []
  5. Verizon CFO Says Company Won’t Sell Huffington Post, June 15, 2015, WallStreet Journal []
  6. 83% OF U.S. HOUSEHOLDS SUBSCRIBE TO A PAY-TV SERVICE, September 3, 2015, Leichtman Research Group []
  7. Dish’s SEC Filings []