Dish Network Corp
October 17, 2014
Events: Deutsche Bank Scenario Analysis
- NASDAQ: DISH
- Recent PPS: $57.96
- Shares Out: 461 million
- Market Cap: $26,720 million
- Net Debt: $4,576
- 2014E EBITDA: $2,854
The Deutsche Bank credit group produces some of the best “Street” research I see (I don’t see much, so take with a grain of salt), and I was fortunate to stumble across a note on DISH from early August that highlights the various potential spectrum monetization options available to DISH. I will briefly summarize.
Option #1: Go It Alone
Very low probability. The market for a fifth wireless player after several rounds of consolidation is virtually nonexistent, and the extreme capital intensity of building out a wireless network would render any returns far too low by Ergen’s standards.
Pros – 1) DISH/Ergen maintain strategic and operational control, 2) Can start with the current generation of technology without being saddled with past technologies. Cons – 1) Massively capital intensive, 2) At significant disadvantage with respect to scale, 3) Significantly erodes strategic value in the near-term by starting its own build out.
Option #2: TMUS Merger
Low probability. DISH has had ample opportunity to acquire TMUS at lower prices, and it is unlikely Ergen has amassed such a valuable spectrum portfolio to relegate DISH to a #3 or #4 player in the wireless market. DB believes Sprint remains on the table as a potential wireless partner if DISH chooses to enter the wireless business.
Interestingly, DB received the most disagreement with this option, particularly from equity investors. Until reading DB’s analysis, I would have been a dissenter-lite here. Likely, I give Ergen’s public musings too much credit, as I kind of took him at his word that he would like to partner with TMUS; to be fair though, I have thought all along that ultimately Sprint and DISH would end up together, as highlighted in my August 2014 note on Sprint.
Option #3: Non-Wireless Partnership/Acquisition (i.e. be acquired)
Moderate NT probability; higher LT probability. In this scenario, a company such as Google would view DISH as a platform for developing alternative uses for the spectrum portfolio, along the lines of Ergen’s vision for data and DISH content consumption anywhere on any mobile device.
Option #4: No Deal Now, Continue Buying Spectrum, and Wait For Partner To Emerge
High probability. DISH’s spectrum portfolio is becoming more valuable by the day as data consumption goes through the roof, and the fact of the matter is the top two players are capacity constrained. DB points out that while capacity is coming to market in the next 12 months – thus potentially reducing the strategic value of DISH’s spectrum – the low band spectrum will take time to “clear” and it is relatively inefficient with regard to high intensity data applications. DISH will then have the largest portfolio of “total empty, and immediately usable” spectrum in the United States.
17 MILE CONCLUSION
While I have perhaps underestimated how long Ergen is willing to wait to monetize DISH’s spectrum portfolio, my worst-case scenario for DISH is that it just sits on its increasingly-valuable spectrum portfolio (obviously within reason, given the build-out requirements) until the Big Two realize they need the capacity. On one hand I strongly believe a S/DISH tie-up makes a ton of sense, but on the other hand you have two massive entrepreneurs in Son and Ergen, and a potential divergence of strategy where Ergen is focused on mobile internet and Son on taking down the Big Two. Though in my extremely limited opinion, I believe there is room for both, as the combined spectrum capacity would be a monster. The bottom line is that while I have no idea how the DISH spectrum is ultimately monetized – and frankly, I don’t believe Ergen or anyone else does at present – I do know that it is an extremely valuable asset that is growing in value every day, and that Ergen at the helm virtually eliminates the possibility of a spectrum value-destroying transaction, thus creating a large margin of safety at current levels. The biggest downside risk is that spectrum capacity rises due to technological advancement – in that event, my bet is that DISH’s spectrum portfolio is worth somewhere in the range of where it trades today. The margin of safety – i.e. the fair value estimate far above current prices – comes from the value the spectrum provides to capacity-constrained operators (please see Bronte Capital’s excellent post on spectrum value), a value likely to be highlighted at the upcoming AWS-3 auction.