Merger With T-Mobile The Right Step, But Dish Needs To Speed Things Along

Dish Network (NASDAQ:DISH) is in talks with T-Mobile (NYSE:TMUS) about a merger, according to a recent Wall Street Journal report. ^[1] The report states that both sides are in broad agreement over the structure of the combined entity but other major details such as purchase price and cash-stock mix are still unresolved. The potential merger looks like a win-win situation for both companies, with T-Mobile getting Dish’s wireless airwaves to expand coverage as well as capacity and Dish getting a good opportunity to put its spectrum to use and enter the wireless business. However, Dish needs to show some urgency as the company is on the clock to meet the spectrum build-out requirements before the due date.

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Merger Will Help Dish Put Its Spectrum To Use

Dish has made significant investments in spectrum over the past few years and is now the fifth largest holder of wireless spectrum in the United States. Dish currently owns licenses to more than 80 Megahertz (MHz) of spectrum and we estimate the pre-tax fair value of Dish’s spectrum holdings to be around $39 billion. (See our calculation methodology – Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation) With the spectrum Dish owns, it should either build its own infrastructure or partner with an existing carrier to provide wireless services. That’s where T-Mobile comes in. T-Mobile U.S serves approximately 57 million subscribers, generating revenues close to $30 billion with a current market value of close to $32 billion. ^[2] It has an advanced nationwide 4G and 4G LTE network, in which Dish has significant interest. A collaboration will help both companies, as follows:  1) Dish will get its hands on an existing network which it needs to put its ample spectrum reserves to use; and 2) T-Mobile will be able to use Dish’s precious spectrum to bolster its network. Another positive for both players is that the merger may be looked upon in a favorable light by the regulators. As the companies do not directly compete with each other, their merger will not result in reduction of choice for the customers.

Bundling Of Services And Sling TV

Buying T-Mobile would allow Dish to offer video, high-speed Internet and wireless voice and data service across the country in one package. The company will also be able to compete better in the saturated U.S. pay-TV market by offering a viable bundling option in which it can combine its satellite service and wireless spectrum to offer consumers a single subscription. Pay-TV penetration is currently very high, with more than 85% of the U.S. TV households subscribing to at least one pay-TV service. Given the saturation level and sluggishness in the housing market, it is difficult to see a significant increase in the number of the U.S. pay-TV subscribers. Moreover, fierce competition between satellite, telcos and cable operators, along with the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), together are adding to the woes of pay-TV operators. Other pay-TV providers have benefited immensely by offering bundled services and Dish needs to come out with its own variant in order to remain competitive.

The merger would also provide Dish an opportunity to publicize its streaming service Sling TV to T-Mobile’s 57 million strong subscriber base. The streaming service is already experiencing encouraging adoption rates and currently has 250,000 paying subscribers, according to re/code. ^[3] Dish could offer free-of-cost promotional packages of the service to T-Mobile’s subscribers. An exposure to such a large consumer base could be very positive for the streaming service. If around 10% of T-Mobile’s customer’s opt for Sling service after the initial trial, Dish could generate additional revenues in excess of $1.3 billion.

Dish Is Cutting It Close

Dish’s spectrum licenses are subject to certain interim and final build-out requirements by the Federal Communications Commission (FCC). Dish must provide reliable signal coverage and offer service to at least 40% and 70% of the population in each area covered by the AWS-4 licenses by March 2017 and March 2021 respectively. ^[4] Dish’s license authorization can be terminated in each area it fails to meet these build-out requirements. However, Dish has not even begun building out its coverage in any of these areas as of now.

The company’s best bet of reaching these build-out requirements is to partner with a carrier already having an operational network. However, Dish failed in its earlier attempts to acquire a telecommunications company when the company made unsuccessful attempts to acquire Sprint (NYSE:S) and Clearwire. ^{[5] [6]} There has been considerable speculation linking Dish to T-Mobile in the past as well, but it remains to be seen whether a deal will actually materialize. ^[7] Meanwhile, the build-out requirement dates for the spectrum continue to inch nearer. Dish has roughly two years to reach a deal, get the required regulatory approval, secure the necessary funding for the transaction and then assimilate T-Mobile’s network. If Dish fails to reach a deal and does not develop its own network, there might come a time when the FCC clock runs out for Dish. In that scenario, the company might have to sell at a huge discount or even worse, completely relinquish the spectrum to the FCC.

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1. Dish Network in Merger Talks With T-Mobile, WSJ, June 4 2015 [↩]
2. T-Mobile U.S. SEC Filings [↩]
3. Sling TV’s Web TV Subscriber Numbers Keep Growing, Now Around 250,000, June 5, 2015, re/code [↩]
4. Dish’s SEC Filings [↩]
5. Dish Billionaire Ergen Lets Sprint Go To SoftBank And Its Billionaire CEO, June 19, 2013, Forbes [↩]
6. Dish bows out of battle with Sprint over Clearwire, Jun 26, 2013, Reuters [↩]
7. T-Mobile CEO Says a Deal With Dish Network Would Make Sense, February 27, 2015, TheStreet [↩]