Events: Pro Forma DISH-TMUS
June 5, 2015
(PF for TMUS)
- NASDAQ: DISH
- Recent PPS: $74.25
- Shares Out: 604 million
- Market Cap: $44,816
- Net Debt: $65,945
- Enterprise: $110,761
To say the least, things are moving quickly in the telecom/cable space, with: the Comcast/Time Warner Cable deal falling apart; the entrance of European wireless company Altice via its purchase of Suddenlink and subsequent interest in Time Warner Cable; the Charter/Time Warner Cable merger announcement; Dish’s impromptu analyst meeting on Tuesday; and the rumored merger discussions between Dish and T-Mobile leaked just within the last 24 hours.
With regard to Charlie Ergen and DISH’s future wireless endeavors, there are hundreds of opinions floating around; and due to the extreme headline-driven nature of the telecom/cable space, those opinions are disseminated on almost a daily basis. But for all the noise and “complexity”, the philosophical situation boils down to an amazingly simple choice. Either
- You believe Charlie Ergen is a greedy financier looking to ‘squeeze’ Verizon Wireless by ‘cornering’ the U.S. spectrum market, and has no intention of building an integrated wireless/video company; or,
- You believe in Charlie Ergen’s long-term vision for the wireless industry, as outlined ad nauseum on DISH conference calls over the last 3 to 5 years
More often than not the philosophical side of the equation receives far more attention than the I-JUST-WANT-TO-MAKE-MONEY side – the DISH situation is no different. Elements of both sides are correct here, but for whatever reason both sides vehemently deny the existence of the other. I guess that is what makes a market.
How could someone in Ergen’s position – with his level of access to information and capital – NOT take a crack at squeezing Verizon? Is capitalism not about squeezing competition? Did Apple not squeeze Blackberry? Did Wal-Mart not squeeze Sears? Frankly, I do not understand the practicalities of #1; but from a philosophical standpoint, the crux of #1 is that Ergen does not have a viable back-up plan to squeezing Verizon, and is thus in effect wasting the industry’s time.
Ergen is maniacally focused on risk/reward and optionality, and is a true “value investor” at heart; thus I do not believe for a second that he would ‘bet the ranch’ on squeezing Verizon. I believe he is 110% committed to his long-term vision of the wireless market in the event he does not successfully squeeze Verizon, as demonstrated by his bid for Clearwire and Sprint in 2013, his large-scale AWS-3 spectrum purchases at “full” valuation, and his current rumored bid for T-Mobile. (Though if in fact he is ‘betting the ranch’, it scares me to think what information he has on Verizon’s network that would lead him to such a high-probability conclusion.)
[Skeptics say that his bid for Sprint in 2013 was merely to push SoftBank into paying more… Honestly step back and think about that – Ergen somehow “forced” another rational human being, who was outside of his physical presence (i.e. Ergen did not have a physical gun to Masayoshi Son’s head), into a decision? Really? If Ergen truly does not know what he is doing, why would SoftBank not hand him Sprint, let him fail, then pick up the pieces at an even cheaper price? The irony being, this is precisely what it appears the U.S. wireless industry will do with SoftBank’s miserable Sprint investment (h/t @modestproposal).]
As such, I believe Ergen is sitting right where he wants to be: with a stunningly gorgeous “heads I win, tails you lose” opportunity set…
Heads. Net of WiFi offloading, North American mobile data traffic (MDT) is projected to grow almost 50% per annum thru 2019. Even when adjusting for handset composition, Verizon’s MDT will grow roughly in line with this projection, which is the equivalent of adding over 600 million new subs to its current network. As Ergen likes to point out, Verizon’s current 100MM sub base is not supportable by 20 MHz of downlink spectrum over the long-term…there are 600 million reasons why he is likely correct. Verizon needs capacity.
Months before the AWS-3 auction Ergen spoon-fed the analyst community how DISH spectrum should be valued post-auction. Even Ergen’s likely biggest critic, TMF Associates, utilized his methodology in a May 2014 blog post. Simply, Ergen said that DISH’s spectrum would be/is worth 2 times the AWS-3 auction total gross winning bids (GWB). This is based on the fact that “uplink” spectrum has very little value in a data-driven mobile world, and thus almost all of the AWS-3 total GWB would go/went toward “downlink” spectrum; and because DISH owned/owns 2 times the amount of downlink spectrum sold in the AWS-3 auction, the imputed valuation is simply 2 times the AWS-3 total GWB.
DISH is worth approximately $208 on a SOTP basis. Heads DISH wins.
Tails. In a non-Verizon scenario, DISH moves in the direction it outlined in its Sprint Merger Presentation, where it becomes an integrated video/wireless provider. We are likely to see a similar presentation if and when DISH officially announces a transaction with T-Mobile.
I was fortunate to have access to a recent Wells Fargo’s DISH note that sketched out pro forma DISH/TMUS financials thru 2021. While it was fortuitous that the TMUS rumor landed not two days later, the framework outlined by Wells Fargo is likely applicable to any wireless partnership that DISH pursues.
With some conservative modification to the Wells Fargo assumptions – such as a $50 TMUS take-out price and a higher level of terminal D&A – I arrive at a Pro Forma DISH/TMUS FVPS of $158. Tails DISH wins.