$25B Sprint Bid Reveals Ergen’s Strategy

Deal Would Give Dish Chief Biggest Swath of U.S. Wireless Spectrum
Author:
Updated:
Original:
article

Dish Network’s unsolicited $25.5 billion offer for Sprint Nextel last week came as a bit of a shock to Wall Street and the rest of the industry.

But in retrospect, the Sprint offer was the final, logical piece of Dish Network chairman Charlie Ergen’s years-long, sometimes wacky wireless strategy. If successful, it could put him in control of the largest piece of wireless spectrum in the U.S., fully capable of delivering true video on the go to every man, woman and child in the country.

Dish has already spent about $3 billion acquiring wireless spectrum from three bankrupt entities — DBSD North America, Terra- Star and Hughes Networks. Ergen acquired Sling Media, makers of the Slingbox, and bought bankrupt video retailer Blockbuster in 2011.

While some of those deals didn’t quite work out as planned — Dish has shuttered most Blockbuster stores, and its streaming-video plans were hampered by rights issues — the addition of Sprint could be the final piece of the puzzle. With Sprint, Ergen would get a vast swath of spectrum, 49 million wireless customers to go with his 14 million Dish subscribers across the country, a retail presence to sell all of its products, and a partner to help him build out the 45 Megahertz of spectrum he already owns.

PART OF A PLAN

“This isn’t something that we just thought of yesterday,” Ergen said. “We’ve been putting a lot of things in place, whether it be the purchase of spectrum in auctions, the acquisition of Sling Media — all those things come together now with the merger with Sprint to make a very unique, powerful company.”

Those benefits weren’t lost on the analysts who follow the satellite giant, either.

By combining its spectrum with that of Sprint (and potentially of Clearwire, majorityowned by Sprint and a past Dish target), Morgan Stanley media analyst Ben Swinburne wrote, “Leapfrogging the incumbents from a cost/ bit perspective, Dish sees the potential to take share and create shareholder value.”

If anyone had doubts concerning Dish’s motivation in the deal, Ergen quashed it in the opening minutes of a conference call with analysts and reporters last Monday.

MOBILE DATA PLAY

After the usual pleasantries, Ergen got down to business, noting that mobile data traffic is growing at a 50% to 60% clip every year, with video driving most of that. He added that video accounts for about 50% of mobile data traffic today and is expected to rise to 80% to 90% in the near future.

“You want to be in your home with video, broadband, data and voice, and you want to be outside your home with those same things,” Ergen said on the call. “And while the cable industry does a really good job in your home, and the current wireless industry does a really good job outside your home, there’s really no one company on a national scale that puts it all together. The new Dish/Sprint will do that.”

According to the deal, Dish would pay $17.3 billion in cash and $8.2 billion in stock in the combined company. The deal would trump an earlier agreement Sprint had to be acquired by Japanese wireless giant SoftBank for $20.1 billion. Sprint said its board of directors is currently evaluating the Dish proposal. SoftBank has said it still believes its deal is superior.

Whether Dish is successful or not, it has little to lose. On the plus side, a win means Dish gets twice the spectrum of its two closest competitors — Verizon Communications and AT&T — and the opportunity to sell its products into a wider subscriber base. Dish could still be a partner to the SoftBank deal, or at least it could end up with Clearwire spectrum. And if it loses altogether, will have weakened a potential competitor in the wireless race.

BIG UPSIDE

Dish’s bid for Sprint Nextel is part of chairman Charlie Ergen’s larger strategy to become a mobile video player.

“As I tell my kids, if you don’t go for it, you won’t get it, and in this case Ergen seems to have plenty to gain by wading into this consolidation with what looks to be fairly limited downside,” Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said.

For quite a while, media CEOs have been talking about the proliferation of wireless video and the impact that multiple screens will have on the business models that have sustained television for decades. Last week, Ergen did something about it.

TAKEAWAY

Dish’s bid for Sprint Nextel is part of chairman Charlie Ergen’s larger strategy to become a mobile video player.

Related