Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Merger speculators waiting on the next big cable or telecom deal have a familiar question: What in the world is Charlie Ergen thinking?

The Chairman, CEO and controlling shareholder of satellite-TV provider Dish Network Corp. has dished out even more money for airwaves that his $27 billion company doesn't need, and which some analysts think kills Dish's chances of getting bought -- the whole reason many investors own the stock. It was a plot twist revealed by the U.S. Federal Communications Commission last week in the results of a year-long spectrum auction.

Dish, which already has a heap of spectrum but no accompanying wireless network, laid out $6.2 billion to scoop up even more. It outspent everyone other than T-Mobile U.S. Inc. -- an actual wireless carrier that needs more capacity for its new unlimited data plans and growing customer base. 

Odd Man Out
Dish has amassed nearly as much wireless spectrum as the big four U.S. carriers, according to data compiled by Bloomberg Intelligence analysts Matthew Kanterman and Josh Yatskowitz. It's unclear why.
Source: Bloomberg Intelligence
*Sprint owns a large piece of 2.5-GHz high-frequency spectrum, which is supports added network capacity but doesn't penetrate buildings as well as the low-frequency spectrum its rivals hold. Sprint also has resorted to using some spectrum licenses as collateral because of cash constraints.

Dish's stock took a beating earlier in the week amid investors' bewilderment. Some interpret the auction results as a sign that Dish may not be able to sell or lease the spectrum at a premium later on. In other words, Ergen paid more than anyone would be willing to pay him for this spectrum, or else they would have outbid him in the auction. Verizon Communications Inc., for example, surprisingly didn't purchase anything in the auction. 

But careful about betting against Ergen. As he said during a recent earnings call, it's not his first rodeo. While industry players have shifted their dollars to prepping for the introduction of faster 5G networks, some still have spectrum needs that Dish can fulfill. It also brings more to the table than spectrum -- 13.7 million pay-TV subscribers and a nice little over-the-top TV-streaming app. 

I don't think Dish wants to build a wireless network so that it can go it alone, despite the company's interest in the possibilities of the "internet of things" (as detailed in a March filing). Let's be real, Ergen is building Dish for a major transaction. It's the reason for the asset swap with Dish's sister company EchoStar Corp. It's why he's hoarding valuable spectrum. He also knows investors won't be satisfied unless there's some sort of megadeal. 

Verizon's reasons for sitting out the auction may be more nuanced than lack of interest, as I wrote yesterday. After all, it has the most constrained network based on its ratio of spectrum to subscribers, according to Matthew Kanterman and Josh Yatskowitz, analysts for Bloomberg Intelligence.

Verizon is thinking about its balance sheet and prioritizing transactions. CEO Lowell McAdam told Bloomberg News's Scott Moritz yesterday that he'd welcome calls from Comcast Corp., Walt Disney Co. and CBS Corp. about potential mergers. I'd also put Dish on that list. Despite Verizon not long ago expressing disinterest in Dish's spectrum, it would be useful to the business.

What's It Worth?
Dish elicits very mixed feelings -- you either think its boatload of spectrum is extremely valuable and can be monetized, or not. Analysts' share-price forecasts range from $45 to $175:
Source: Bloomberg

It's not crazy to think that Dish could be broken up either. Comcast is branching into wireless by way of its Wi-Fi hotspots and a resale agreement with Verizon. Because of McAdam's remarks, the chatter right now is that Verizon and Comcast will merge. But if that doesn't happen, and given Comcast's surprisingly subdued participation in the auction, it is likely to buy Verizon's smaller competitor T-Mobile or perhaps some of Dish's spectrum.

For Dish, the cleanest and most interesting combination may be with T-Mobile, even though it just filled its own spectrum needs. Amy Yong, an analyst at Macquarie Group Ltd., has a brilliant idea. While she doesn't see Dish-T-Mobile as the most likely of the possible mergers, she notes that in this scenario Dish's Sling TV could be re-branded to T-Mobile, a stronger name among consumers. Sling is an app that allows you to watch live TV over the internet for a far cheaper price than cable. It's sort of a hidden gem in Dish that would be more valuable in someone else's hands who can scale it up. For Verizon or T-Mobile, it could be their answer to AT&T's DirecTV Now over-the-top product. 

The biggest caveat I've seen to any Dish megamerger is the perceived regulatory hurdle. But under the Trump administration, conventional wisdom regarding cable and telecom deals should probably be tossed out. President Donald Trump wants to see jobs and investment in infrastructure, so if these companies can promise that, these transactions may be feasible. 

Right now, Ergen may look as if he belongs on a special episode of "Hoarders" with his stack of spectrum licenses. "I'll use them someday!" But he's smarter than he's getting credit for. Stay tuned. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. As Verizon meticulously plans how it spends its money, we now know that amid the end of the spectrum auction it has quietly looked at Straight Path Communications Inc., the 5G spectrum license holder that agreed to sell to AT&T Inc. for $1.6 billion last week. It was also working on the deal announced Tuesday with Corning Inc. for $1 billion worth of fiber-optic cable and equipment to improve its current wireless coverage and speed its 5G launch.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net