Dish’s Price Estimate Reduced To $71 Based On Revision In Valuation Of Company’s Spectrum Holdings

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We recently reduced our price estimate for Dish Network (NASDAQ:DISH) to $71, primarily due to revision in the estimated value of Dish’s spectrum holdings. Dish has made significant investments in spectrum over the past few years and currently owns licenses to approximately 75 MHz of spectrum nationwide, covering over 23 billion MHz-POPs. However, Dish recently decided to relinquish $3.4 billion worth of its AWS-3 spectrum to the FCC in lieu of the AWS-3 discount that the commission cancelled earlier. Our earlier valuation of Dish’s overall spectrum holdings was over $40 billion which has come down to $37 billion after adjusting for the relinquished spectrum. We believe that Dish’s spectrum holdings contribute close to 60% of the company’s stock price with Dish’s pay-TV business constituting the rest.

See our complete analysis for Dish Network

Dish Relinquishes Part Of AWS-3 Spectrum, Bring Down Valuation Of Its Spectrum Holdings

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AWS-3 is a mid-band spectrum with qualities of both low band and high band spectrum, which can help wireless carriers provide better connectivity. 65 MHz of this spectrum was auctioned by the FCC at the auction which concluded last January, which included 50 MHz of paired spectrum and 15 MHz of unpaired uplink spectrum. [1] Spectrum is considered paired spectrum if it has two associated blocks of different frequency bands. In this combination, one band can be used as the uplink spectrum and the other band can be used as the downlink spectrum. Dish acquired 25 MHz of the AWS-3 wireless spectrum in the FCC auction which included 13 MHz of paired spectrum and 12 MHz of unpaired spectrum. The company spent close to $10 billion at the auction but also received a discount of 25% from the FCC as it bid through it small business partners. After factoring in the discount, the actual price for the spectrum acquired by Dish was over $13.3 billion.

However, the FCC subsequently ruled that Dish’s bidding entities were not eligible for the discount under the small business bidding credit rule and cancelled the $3.3 billion discount. [2] This effectively increased Dish’s liabilities by the same amount. The satellite-TV provider is also facing a cash crunch, having paid $8.7 billion at the start of the year in spectrum deposits. [3] Now Dish has decided to relinquish $3.4 billion worth of its spectrum winnings to the FCC in lieu of the cancelled discount. [4] The company will retain spectrum worth $9.9 billion which covers approximately 6.6 billion MHz-POPs, effectively maintaining 83% of the original MHz-POPs. Our earlier valuation of Dish’s overall spectrum holdings was over $40 billion which has come down to $37 billion after adjusting for the relinquished spectrum. (See our calculation methodology – Dish Network – Price per MHz/Pop for AWS-3 Spectrum Analysis) There is a looming spectrum crunch in the U.S. wireless industry given the increasing data needs of mobile customers. Realizing this spectrum crunch and the associated opportunity, Dish Network has been strategically amassing spectrum. The company is now the fifth largest holder of wireless spectrum in the United States and owns licenses to approximately 75 MHz of spectrum nationwide, covering over 23 billion MHz-POPs. We believe that Dish’s spectrum holdings contribute close to 60% of the company’s stock price with Dish’s pay-TV business constituting the rest.

Dish’s AWS-4 Spectrum Is Its Most Valuable Asset

Dish amassed 40 MHz of AWS-4 spectrum when it acquired TerreStar and DBSD North America out of bankruptcy in 2011 for a combined sum of less than $3 billion. We estimate the pre-tax value of this same spectrum to be close to $22.4 billion at $1.73 per MHz-Pop. (See our calculation methodology – Dish Network – Price per MHz/Pop for AWS-4 Spectrum Analysis) The AWS spectrum supports LTE and can be used by wireless phones and other mobile devices for voice, messaging and data services. Most smartphones are AWS-enabled and can communicate using this spectrum. It should also be noted that there is a significant difference in the value of downlink spectrum as opposed to its uplink counterpart. The Federal Communications Commission (FCC) has conditionally allowed Dish to use all of its AWS-4 spectrum for downlink purposes, increasing the value of Dish’s spectrum.

Dish should now focus on monetizing its spectrum. The company was earlier in discussions with T-Mobile (NYSE:TMUS) about a possible acquisition, but the cancellation of Dish’s spectrum discount by the FCC all but ended those plans. Dish is also 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. [5] With any sort of M&A likely out of the picture due to Dish’s cash constrained position, the company could welcome the chance to lease out its spectrum. (Read More – With T-Mobile Deal Dead In The Water, Dish Could Lease Spectrum To Verizon) A deal with Verizon would help the company in monetizing its unused spectrum and would 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.

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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. FCC Votes to Deny $3.3 Billion in Discounts Sought by Dish Network, August 17, 2015, Wall Street Journal []
  3. Dish Network’s SEC Filings []
  4. DISH Statement on AWS-3 Spectrum, October 01, 2015, Business Wire []
  5. What Telecom CEOs Are Saying: Highlights from Goldman Sachs Conference, September 18, 2015, Wall Street Journal []