Dish Cash Hoard Signals Wireless Possibility: Corporate Finance

Dish Network Corp. Chairman Charlie Ergen
The company, led by Chairman Charlie Ergen, is expanding into wireless after losing customers in six of the last nine quarters as competition from DirecTV and cable providers pressures revenue and climbing programming costs boost expenses. Photographer: Andrew Harrer/Bloomberg

Dish Network Corp. has amassed a record amount of cash through bond sales as the second-largest U.S. satellite-television provider seeks to expand into the wireless business to offset a decline in its core customer base.

Dish brought its cash on hand to $5.6 billion on June 30 from about $2.7 billion in the first quarter, KDP Investment Advisors Inc. calculated. It issued $2.9 billion of five- and 10-year notes in separate sales in May and July, including $1 billion last week, according to data compiled by Bloomberg.

The company, led by Chairman Charlie Ergen, is expanding into wireless after losing customers in six of the last nine quarters as competition from DirecTV and cable providers pressures revenue and climbing programming costs boost expenses. Dish spent about $3 billion to buy wireless spectrum from DBSD North America Inc. and TerreStar Networks Inc. that it hopes to use to expand into mobile video, pending approval from the Federal Communications Commission.

“He must be planning something to do with that money,” Spencer Godfrey, an analyst at Montpelier, Vermont-based KDP, said of Ergen in a telephone interview. “The two most likely scenarios are that he’s going to either build a network or buy another wireless carrier that has a network.”

Bob Toevs, a spokesman for Dish, declined to comment on the use of proceeds from the bond sales beyond the “general corporate purposes” outlined in a July 19 regulatory filing.

Debt Level

The company has about $10.1 billion of bonds outstanding, including the latest issues, and it doesn’t have any loans, Bloomberg data show.

Dish raised $1.9 billion, up from an earlier-marketed $1.5 billion, in a two-part debt offering in May. The deal included sales of $900 million of 4.625 percent, five-year notes and $1 billion of 5.875 percent, 10-year debt via the company’s Dish DBS Corp. unit.

The company has since boosted its sale of the 5.875 percent notes maturing in July 2022 to $2 billion as investors offered to buy more securities.

“It’s not that important that they come to market right now for all this debt if they were just looking to refinance,” Dave Novosel, an analyst at Chicago-based bond researcher Gimme Credit LLC, said in a telephone interview, referring to record-low interest rates reached today on U.S. government and investment-grade corporate debt. “It would kind of be a very conservative way of doing it and it’s possible, but it seems to me that they’ve been kind of hinting about doing something in the broadband space now for a long period of time.”

Notes Fall

The 5.875 percent notes, which traded as high as 102.7 cents on the dollar, were quoted at 101.2 cents at 9:27 a.m. in New York today, Bloomberg prices show. The bonds yield 5.71 percent, compared with 3.21 percent for DirectTV’s $1.49 billion of senior unsecured bonds due in March 2022.

Standard & Poor’s assigns Dish a credit rating of BB-, while Moody’s Investors Service grades the company one level higher at Ba2. S&P said the amount of debt raised won’t affect the satellite-television provider’s credit outlook.

The two offerings will boost Dish’s ratio of debt to earnings before income, taxes and depreciation to 3.0, up from 2.2 at the end of the first quarter, KDP estimated. That would be the highest since the satellite-television provider had leverage of 3.1 times in the third quarter of 2006 and compares with a ratio of 2.5 at DirecTV for the period ended March 31, Bloomberg data show.

‘Biggest Concern’

Cash and cash equivalents at Dish will jump to $5.6 billion after proceeds from the bond add-on deal and the May debt offering, KDP calculated. That’s the largest balance since Dish split from EchoStar Corp. in 2008, Bloomberg data show.

The increase to Dish’s leverage is “manageable,” Monica Erickson, a Los Angeles-based money manager and credit analyst at DoubleLine Capital LP, which oversees $39 billion, said in a telephone interview. “The biggest concern is just that they don’t do something really stupid. When you’re sitting on that much cash, that’s always the risk. Making a bad acquisition, doing something that is going to be too large for them to be able to handle from a balance-sheet perspective.”

Dish announced a non-recurring dividend of $2 a share, or almost $900 million, on Nov. 7. The company previously paid a special dividend of $2 a share in November 2009.

“There’s a history at Dish of these kind of one-time large dividends to shareholders, which from a bondholders’ perspective would be absolutely the worst use of that capital,” Godfrey said.

Sufficient Capital

Dish purchased spectrum, or airwaves that the government has designated for sending data from satellites, in deals with bankrupt DBSD and TerreStar. Ergen wants to use that to provide land-based voice and data service, allowing his company to compete with wireless providers such as AT&T Inc. and Verizon Wireless.

While the FCC approved Dish’s purchase on March 2, the agency said the company wouldn’t be allowed to repurpose the spectrum until regulators have written new rules that allow the airwaves to be used for high-traffic ground-based networks.

Dish’s cash hoarding may be the company’s way of signaling to the FCC that it has the capital necessary to follow through on construction of the network, according to Godfrey.

“If you’re the FCC, that would give you a little bit more confidence in Dish’s ability ultimately to build out that network,” he said.

Ergen said in May that he hoped the FCC rulemaking process would be “done by the end of the summer,” noting that the agency can make a decision any day after June 1.

‘Manageable Acquisition’

“I think you can expect us to be conservative in how we enter the wireless business,” Ergen said during the company’s May 7 first-quarter earnings call. “But that doesn’t mean that you don’t go out and do things.”

One alternative to building a wireless network on its own is an acquisition of a smaller wireless carrier such as MetroPCS Communications Inc. or Leap Wireless International Inc., according to Erickson.

“If they were to be able to acquire a smaller wireless provider, that would kind of get their foot in the door,” Erickson said. Leap “would be a relatively small, or manageable acquisition.”

Dish probably would prefer to strike a partnership with a smaller carrier instead of buying one, according to Todd Mitchell, an analyst at Brean Murray Carret & Co. in New York.

Spectrum Portfolio

“It is highly compelling for Dish to go to a wireless company that’s not AT&T or Verizon, someone below, and say, ‘Let’s partner -- I’ve got a video delivery platform, you do data and voice, two separate infrastructures, seamless to the consumer,’” Mitchell said in a telephone interview. “Then you can offer all-you-can-eat pricing that Verizon and AT&T are moving away from.”

Making use of its spectrum portfolio will allow Dish to maintain a competitive position in the telecommunications market and offer relief to margins that have been pressured by price battles, according to Mitchell.

“Dish has always been the low-cost leader in pay-TV, but it doesn’t make sense anymore when two telecommunications companies are using video as a loss leader to be the low-cost leader,” Mitchell said. “The way people consume content is changing. It’s much more on demand and on mobile devices. Charlie wants to build a platform to do that. He needs to do something.”

‘Next Step’

Operating margin at Dish declined to 16 percent in the first quarter from 20 percent in the year-earlier period, Bloomberg data show. That compares with 19 percent for DirecTV.

Dish lost about 10,000 net subscribers in the second quarter, its first decline in three quarters, the company said in a July 19 regulatory filing. The satellite-television provider added about 665,000 gross new subscribers in the period, up 16 percent from the year earlier period. The results don’t account for Dish’s decision to drop AMC Networks Inc. at the end of the quarter after saying the programmer charged too much for shows.

AMC contends that Dish is cutting off its networks as a response to litigation stemming from a 2008 lawsuit that may cost the satellite company $2.5 billion.

Dish stock fell 36 cents to $28.56 at 11:12 a.m. in Nasdaq Stock Market trading. The shares have risen 1.5 percent this year through yesterday, compared with a 7.4 percent gain for the S&P 500 index. The shares closed yesterday at $28.92, down from as high as $45.98 in October 2007.

Ergen “realizes that the current business model is no longer going to work going forward,” said Novosel of Gimme Credit. “He wants to take kind of the next step in its evolution.”

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