Ergen’s Next Move Could Be T-Mobile

Dish’s Wireless Plan Needs Partner, Auction Help
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Dish Network chairman Charlie Ergen’s grand plan to create his own wireless-broadband network is nearing a critical phase, and upcoming federal spectrum auctions could play a key role in whether he moves forward or cashes in his chips.

The Federal Communications Commission is scheduled to begin the much-anticipated AWS-3 wireless auctions on Nov. 13. It will split off about 65 Megahertz of spectrum in two sub-bands: one will be used by government agencies like the Defense Department.

Dish, Verizon Wireless, AT&T and T-Mobile have all said they will bid on AWS-3 licenses, for which the FCC has set a reserve price of $10.6 billion.

But for Dish, the auction could be even more meaningful, because it will set a value for spectrum it already owns.

INVESTORS ARE WORRIED

As the auction draws nearer, investors are worrying that it could have a detrimental effect on Dish by placing a lower value on its spectrum.

Dish stock, which closed at $58.86 on Oct. 15, is down about 10% since Oct. 3.

Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak currently values Dish’s wireless spectrum at about $20 billion. Its total market capitalization is about $27 billion, according to Dow Jones.

“It’s a big number,” Wlodarczak said of the spectrum value. “And I think [Ergen] thinks it’s even bigger.”

Ergen began amassing spectrum in 2011, buying bankrupt providers like DBSD North America and TerreStar, and has spent billions of dollars on licenses that cover most of the U.S.

Ergen has said he intends to build his own wireless network, though he has not spelled out if he wants strictly a data service or will include some type of cellular or cellular- like phone service. He said he will only do so with a partner, preferably a wireless company that can help him offset some of the massive costs involved. Otherwise, he would rather divest the spectrum than try to build it out alone.

Wlodarczak said he believes Ergen has a third option — leasing the spectrum to a larger provider, like AT&T or Verizon.

Nevertheless, Dish has spent most of the past two years searching for a wireless partner.

Dish at first thought that partner might be WiMax pioneer Clearwire, launching a $5 billion tender offer for the company in January 2013. Sprint ended up with those assets after a prolonged tussle with Dish.

In April 2013 Dish tried to buy 100% of Sprint for $25.5 billion, losing out that time to Japanese wireless carrier SoftBank, which bought an 80% interest in Sprint for $21.6 billion.

Next on Dish’s list could be T-Mobile. A merger attempt between mobile provider and AT&T in 2011 was rejected by the federal government, and French telecom startup Iliad recently said it was withdrawing a takeover bid after T-Mobile parent Deutsche Telekom turned down a $36-per-share offer.

Dish has the financial wherewithal to pursue T-Mobile, and it would have an easier time with regulators than AT&T because this combination would not reduce competition. Ergen has reportedly talked with T-Mobile in the past.

MoffettNathanson principal and senior analyst Craig Moffett, though, points out that a Dish merger would do little for T-Mobile, which already has enough spectrum. Dish’s wireless licenses are in lower frequencies.

Wlodarczak said Dish could set its partnership sights beyond traditional wireless carriers. “You have to think out of the box here,” he said. Potential Dish partners could include Internet leaders Google or Facebook. Or Dish could make another run at Sprint.

“Anybody who wants to be disruptive is a potential partner,” Wlodarczak said.

RUNNING OUT OF OPTIONS

Wlodarczak doesn’t believe that Dish will make a move before the AWS-3 auctions end. But he believes Dish’s options are running out.

Under license terms, Dish must built out 40% of its markets by the end of 2017 and 70% by the end of 2020. While that is still two years off and could be extended, like Rome, wireless networks aren’t built in a day. And Dish is running short of potential partners after the Clearwire and Sprint setbacks.

AT&T and Verizon are unlikely partnering options, as each has a competitive video offering (and AT&T is seeking approval to merge with DirecTV).

That leaves T-Mobile, which, even though it’s had two potential other mergers fall through, might take the stance that Dish needs it more than it needs Dish.

Wlodarczak believes that’s why the auction will be critical in setting a hard value for spectrum. “It’s a much easier conversation with T-Mobile if there is a proxy out there,” he said.

Dish Network chairman Charlie Ergen’s grand plan to create his own wireless-broadband network is nearing a critical phase, and upcoming federal spectrum auctions could play a key role in whether he moves forward or cashes in his chips.

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