How Does Sprint Fit In Dish’s Wireless Ambitions?

Dish Network (NASDAQ:DISH) surprised investors last Monday with its $25.5 billion bid to buy Sprint (NYSE:S). Japanese telco Softbank had already made a $20.1 billion offer for a 70% stake in the wireless operator. Dish said that its counteroffer, which values Sprint at about $7 a share, is 13% higher than Softbank’s bid and will bring greater synergies to the partnership. CEO Charlie Ergen has long been clear about his ambitions in the wireless industry, but most investors did not anticipate a move of this magnitude.

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Dish Hunting For Wireless Spectrum

Dish Network has been aggressively acquiring wireless spectrum for a while in order to enter the wireless space. In 2011 Dish acquired bankrupt DBSD and Terrestar for their spectrum. Both acquisitions, valued at $2.9 billion, were a part of the company’s initiative to build a wireless service offering voice, video and high-speed Internet, both at home and for mobile devices. Overall, Dish has spent nearly $4 billion on such acquisitions since 2007.

Earlier this year Dish made an aggressive bid to acquire a 24% stake in Clearwire for $2.2 billion. Clearwire owns the rights to radio frequency spectrum in the 2.5 GHz range and provides service primarily using the 4G mobile WiMAX standard. However, Sprint is the majority shareholder with 50.8% stake in the company. At this point, Sprint, Softbank, Dish and Verizon (NYSE:VZ) all want a piece of Clearwire’s valuable spectrum.

Opportunity In Wireless

Buying Sprint would allow Dish to offer video, high-speed Internet and voice service across the country in one package whether people are home or on the go. Currently, Dish offers video services but its satellite Internet service isn’t as fast as those from wired providers. Dish says that with this potential acquisition it could deliver internet service wirelessly from Sprint’s cellphone towers to an antenna installed on a roof.

The company wants to compete better in the saturated U.S. pay-TV market by offering a viable bundling option where it can combine its satellite service and wireless spectrum licenses with Sprint’s wireless capabilities and offer consumers a single subscription. Dish could either build its own network, which would be expensive and time consuming, or buy an existing carrier like Sprint which can provide ready-to-use infrastructure.

Dish sees this bundling potential as a growth opportunity, as the pay-TV market is getting saturated in the U.S. Pay-TV penetration is currently very high, with more than 90% of the U.S. TV households subscribing. Given the saturation level and slowdown in the housing market, it is difficult to see a significant increase in the number of the U.S. pay-TV subscribers. Moreover, Dish’s main satellite competitor DirecTV has performed comparatively well over the last few years, and having bundled services could help Dish better compete with DirecTV.

While the U.S. wireless market is also highly saturated, demand for services (mostly data services) continues to increase and consumers are willing to pay for mobile connectivity. With more than 55 million subscribers and $35 billion in revenue, Sprint offers a path for either investor (Dish/Softbank) to profit from the boom in wireless internet traffic. Sprint’s potential is further bolstered by its stake in Clearwire and its huge spectrum position.

Impact Of Sprint’s Acquisition

In Dish’s offer, the total consideration consists of $17.3 billion in cash and $8.2 billion in stock. The company intends to fund the cash portion of the deal using $8.2 billion of balance sheet cash and additional debt financing. ^[1]

This acquisition would create an entity with over 60 million retail subscribers and $50 billion in revenues, helping Dish better compete in the pay-TV industry, as well as against wireless behemoths Verizon and AT&T. However, it would create a highly leveraged company with over $40 billion in debt, the servicing of which could prove to be an issue with a combined EBITDA of about $10 billion.

In its letter to Sprint’s board, Dish said that it had received a “highly confident letter” from Barclays with regard to its financing, which confirms the company’s ability to raise the required financing. Dish stated that it would have to raise about $9.3 billion total in new funding. It will likely take months for this saga to play out, but if Dish does ultimately acquire Sprint it would be a good strategic move, albeit an expensive one.

Our price estimate for Dish Network stands at $38, roughly in line with the market price.

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1. DISH Network Proposes Merger with Sprint Nextel Corporation for $25.5 Billion, Dish Network, 15th Apr, 2013 [↩]