T-Mobile and Dish Have More Options Than Each Other

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Dish CEO Ergen: The Pros and Cons of a T-Mobile Deal

For T-Mobile US Inc., a deal with satellite-TV provider Dish Network Corp. isn’t the only option -- and it may not be the best one either.

The fourth-largest U.S. wireless carrier has climbed 15 percent since Sprint Corp. decided in August to drop its bid for T-Mobile because of regulatory pressure. Earnings at the $32 billion company have gotten better, too, as it gained more subscribers. Because of that, T-Mobile’s German parent Deutsche Telekom AG can command top dollar for what is probably the last major U.S. mobile-phone service provider still obtainable.

“T-Mobile has outperformed their expectations, that’s for sure,” said Sergey Dluzhevskiy, a Rye, New York-based analyst at Gabelli & Co. “They are going to be looking for the best possible deal. Charlie Ergen is a tough negotiator, and obviously Deutsche Telekom is not a forced seller.”

Dish Chief Executive Office Charlie Ergen said in a Bloomberg TV interview that T-Mobile remains a logical merger partner for his $34 billion company, but Deutsche Telekom may be in a position where it doesn’t want to do a deal.

“Would Dish and T-Mo be a logical combination? I think it would be. I think that there are certainly a lot of positives to that, if there’s willing participants,” Ergen said. “They’re obviously controlled by a German company who has strategic initiatives, both in Europe and the United States, and they may not be in a position where they want to do anything.”

Pricey Target

T-Mobile would be on the pricier side for a billionaire dealmaker who isn’t known for paying up. Ergen amassed his stockpile of spectrum, or wireless airwaves, mainly through bankruptcy auctions. While he did shell out most of Dish’s cash for the latest government sale of bandwidth, he used a loophole to get about $3 billion in discounts.

T-Mobile shares have more than doubled to $39 since combining with MetroPCS Communications Inc. in 2013. Dish has risen 86 percent over that same stretch, but is down 0.4 percent so far this year. It closed Friday at $72.62.

In a sale, T-Mobile could probably command about $49 a share, Dluzhevskiy of Gabelli said. That’s about a 25 percent premium to a stock price that has already inflated with takeover speculation.

Another sticking point is that Dish would likely pay for a large portion of any T-Mobile takeover in stock. Deutsche Telekom is concerned that Dish shares are overvalued and the premium investors now assign to its unused spectrum will go away once those airwaves are put to use, according to people familiar with the matter, who asked not to be identified because the information is private.

No Urgency

T-Mobile will eventually need more spectrum to continue growing and a deal with Dish would let it avoid spending billions at government auctions. That’s not a pressing need right now, though, because T-Mobile’s customer base is still relatively small and it has ample capacity where it has coverage, Walter Piecyk, a New York-based analyst at BTIG, wrote in a June 4 report.

At $49 a share, a takeover of T-Mobile would be a $62 billion deal, including debt. It’s big, but several billion less than what Comcast Corp. was willing to pay for Time Warner Cable Inc. And there are companies in the industry, Comcast included, that might consider the price tag worth it.

Many Options

Buying T-Mobile would help Comcast offer TV, Internet, mobile and wireline service in one package -- a “quadruple play” that peers in Europe have already been moving toward, Dluzhevskiy said.

“Obviously Dish is there, so it’s an option, but it’s not the only option,” Gabelli’s Dluzhevskiy said. “This is an asset that potentially can create value for a number of different parties in the industry.”

A representative for Deutsche Telekom declined to comment.

Altice SA, which was in the running for Time Warner Cable, is more of a long-shot buyer. Still, the cable operator has said it wants the U.S. to ultimately account for half of its business and there aren’t many other big targets available to get it there.

Even Charter Communications Inc. could take a look after it digests the planned $79 billion purchase of Time Warner Cable announced in May.

Wireless suitors for T-Mobile are also a possibility. Foreign carriers such as Mexican billionaire Carlos Slim’s America Movil SAB could consider a bid to expand their U.S. presence. Sprint and its majority owner SoftBank Corp. could also make another run at T-Mobile if the 2016 presidential election brings in an administration more amenable to its case.

Keep It

There’s nothing stopping Deutsche Telekom from just holding onto T-Mobile either.

“Deutsche Telekom seems to be struggling with having ownership of any asset in North America,” said Craig Moffett, co-founder and analyst at MoffettNathanson LLC. “You have to wonder why they’d want to shed the best-performing asset they’ve got. The results at T-Mobile keep getting better.”

Dish also has “other options that may be more attractive to our board and our shareholders,” Ergen said.

Dish doesn’t need T-Mobile today because it’s generating free cash flow and still has time before government deadlines to use its spectrum kick in, BTIG’s Piecyk wrote in his June 4 report.

If Ergen can’t strike a deal with T-Mobile, he could instead explore a breakup of Dish that would put the spectrum in a separate business with a sale-leaseback structure. Then there’s always the potential for a sale to Verizon Communications Inc.

Dish has made attempts at other wireless deals in the past that haven’t come through in the end. The company’s bids for Sprint and Clearwire Corp. both failed. “Sometimes the best deal is the deal you don’t do,” Ergen said.

“My shareholders aren’t calling up and saying, ‘We’re mad at you because you didn’t do this deal,’” he said. “Or, ‘We’re mad at you because you started this deal and didn’t do it.’”

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