Dish Deals Made Possible by Exxon-Like Cash: Real M&ABrooke Sutherland
Dish Network Corp. Chairman Charlie Ergen has accumulated a record $10 billion in cash, leaving investors to speculate whether he’s setting his sights on a takeover of T-Mobile USA Inc. or a merger with rival DirecTV.
The satellite-TV service tripled its cash balance during the past year by selling debt, including a $2.3 billion offering last week, amid a planned wireless expansion that already prompted a bid for Clearwire Corp. Ergen’s $16.4 billion company now has the most money among U.S. television and phone providers, according to data compiled by Bloomberg.
Ergen’s cash stockpile -- about the same as Exxon Mobil Corp.’s -- puts a deal for Deutsche Telekom AG’s T-Mobile within reach, said Guggenheim Partners LLC, which would finally let Ergen bundle a nationwide wireless-phone network with his pay-TV system. He may also seek to merge with DirecTV and build a wireless network using spectrum he already owns, according to Standard & Poor’s. Smaller deals, such as snatching MetroPCS Communications Inc. away from Deutsche Telekom or buying Leap Wireless International Inc., are other possibilities, according to Macquarie Group Ltd.
“The question remains: What are they going to do with this ample liquidity?” Tuna Amobi, a New York-based equity analyst at S&P, said in a telephone interview. “I wouldn’t rule out anything, really, knowing Charlie.”
Bob Toevs, a spokesman for Englewood, Colorado-based Dish, declined to comment on how the company is planning to spend its money.
Ergen is already trying to break up one of several current mergers in the telecommunications industry, offering $7.9 billion in January for Bellevue, Washington-based Clearwire, which Sprint Nextel Corp. agreed to buy in December with financial backing from Tokyo-based Softbank Corp. Elsewhere in the industry, Deutsche Telekom is trying to combine T-Mobile with MetroPCS as the Bonn-based company seeks to distance itself from the U.S. market, where its wireless business is in fourth place.
Dish raised $2.3 billion last week by offering bonds, the company’s fourth debt sale in the past 12 months. Added to its $7.4 billion of cash as of Dec. 31, Dish’s current balance is about $9.7 billion, and the figure may rise to $10.1 billion on June 30, according to an April 5 analysis by Macquarie’s Kevin Smithen and Amy Yong.
That’s three times greater than its stockpile on March 31, 2012, and about the same as Exxon, the world’s second-biggest corporation with a market capitalization 24 times larger than Dish’s. While Comcast Corp.’s Dec. 31 cash balance of $12.4 billion exceeds Dish’s current figure, the cable operator spent $10 billion of cash to buy the rest of NBCUniversal Inc. in March.
Ergen is “clearly getting ready for something,” Spencer Godfrey, a Montpelier, Vermont-based credit analyst at KDP Investment Advisors Inc., said in a phone interview. “Having that cash opens a lot of options.”
Today, shares of Dish rose 1.2 percent to $36.69. Leap’s stock climbed 2.9 percent, the most in almost four weeks, to $5.98.
While Dish has already challenged Overland Park, Kansas-based Sprint’s offer for Clearwire and, according to a person familiar with the matter, offered $11 a share during early bidding for MetroPCS, the company’s latest debt offering suggests Ergen may have a bigger prize in mind, said Shing Yin, a New York-based analyst at Guggenheim.
“It’s probably not going to be a smallish deal,” Yin said in a phone interview. “In the universe of options, T-Mobile sounds like it might be a better fit, both strategically in that whatever attracted Dish to MetroPCS should apply to T-Mobile at an even larger scale, and the price tag of the deal would be more aligned with the $10 billion in cash that they have.”
Shareholders of MetroPCS are scheduled to vote on April 12 on Deutsche Telekom’s $33 billion plan to merge the company with T-Mobile, amid opposition from investors such as P. Schoenfeld Asset Management LP and Paulson & Co. Deutsche Telekom is reviewing improved terms for the deal to secure approval from MetroPCS shareholders, two people familiar with the matter said today.
Antitrust regulators blocked AT&T Inc. from buying T-Mobile for $39 billion in 2011. For Ergen, who has said he is willing to spend “billions” on a new wireless network to add mobile data and voice services to his company, a deal for T-Mobile would get him there, Yin said.
If Dish wants to use its spectrum to build a wireless business, “the best way to go is to go for a national footprint,” Yin said. “T-Mobile actually does have a close-to-national network.”
Another option could be for Dish to help Deutsche Telekom sweeten its bid for MetroPCS and then work out a joint venture or partial buyout of T-Mobile, according to Matthew Harrigan, a Denver-based analyst at Wunderlich Securities Inc.
Deutsche Telekom “would probably like to find an exit strategy,” Harrigan said in a phone interview. Ergen is “still a ways away from being able to fund acquiring all of T-Mobile, but he’s certainly moving in the right direction.”
Deutsche Telekom spokesman Philipp Kornstaedt declined to comment on speculation regarding Dish.
Dish’s record cash stockpile also raises the question of whether it’s weighing a merger with DirecTV, a competing satellite-TV company with a market value of $32 billion, according to S&P’s Amobi. Dish’s spectrum makes it a more attractive partner and its cash gives it greater financial flexibility in terms of the structure of a potential transaction, Amobi said.
“There’s probably a little bit more impetus for that kind of deal now,” Amobi said. “One of the questions DirecTV has faced quite a lot is what are they going to do about broadband, so potentially a merger with Dish could answer that question.”
Although Ergen has said he wants to partner with a wireless company to gain a network, a tie-up with DirecTV could make building his own system more feasible, Amobi said.
With a Dish-DirecTV merger “you could even begin to kind of imagine a network build-out,” he said. Given the amount of cash and spectrum Dish has and the potential for cost cutting if the two companies are melded, “it would begin to make probably a little bit more sense.”
“Instead of responding to speculation, we feel our time is better spent on continuing our industry leading growth, increasing shareholder value and profitably growing our business,” Darris Gringeri, a spokesman for El Segundo, California-based DirecTV, said in an e-mail when asked whether the company would be interested in a merger with Dish.
While bigger deals can’t be ruled out and Ergen’s strategy is unpredictable, the Dish founder also has a history of being financially prudent and may prefer to seek partnerships or smaller takeovers, said Yong of Macquarie.
Dish could make a higher offer for MetroPCS if the target company’s shareholders vote down the deal with Deutsche Telekom this week, or bid for U.S. wireless carrier Leap, Yong said. MetroPCS has a market value of $4.1 billion, while Leap’s is $460 million.
“He would be more willing to maybe dip his toe in the water a little bit with a smaller player first,” Yong said of Ergen. Buying Leap or MetroPCS “would give him a little bit more flexibility to do something on a smaller scale before launching something really big.”
Greg Lund, a spokesman for San Diego-based Leap, declined to comment on Dish. “Looking more broadly, we have repeatedly stated before that there should be further consolidation in the industry,” he wrote in an e-mail. “What that means for us is not appropriate or realistic to forecast.”
A spokesman for Richardson, Texas-based MetroPCS declined to comment on whether the company had received any indication of interest in a boosted bid from Dish.
If no suitable targets emerge, Ergen could also use the cash to fund a special dividend for shareholders or build his own network, said Jaison Blair, a New York-based analyst at Telsey Advisory Group LLC.
KDP’s Godfrey said building, rather than buying, a network would likely cause the most damage to Dish’s credit rating, which is currently ranked Ba2, the second-highest step of speculative grade, at Moody’s Investors Service.
Still, “it’s not out of the question,” he said. Ergen “wasn’t in the cable business until they put up their first satellite. He’s a very good poker player, professionally and otherwise. I don’t think he’s really going to tell us” what he’s up to.