Dish Offers $25.5 Billion to Merge With Sprint

Dish is offering more cash and a larger ownership stake than the pending SoftBank proposal, Dish said in a news release. The cash portion of the proposal is an 18 percent premium over the $4.03 per share of SoftBank’s proposal, and “and the equity portion represents approximately 32 percent ownership in the combined Dish/Sprint versus SoftBank’s proposal of a 30 percent interest in Sprint alone,” it said. “Together this represents a 13 percent premium to the value of the existing SoftBank proposal.” Meanwhile, Verizon Wireless offered to pay as much as $1.5 billion to buy spectrum leases from Clearwire, said The Wall Street Journal, citing unidentified sources. In December, Sprint unveiled a deal to buy the shares of Clearwire it doesn’t already own for $2.2 billion (CED Dec 14 p5).

One potential downside to a Dish/Sprint deal for regulators is that the SoftBank/Sprint transaction is already in day 136 of its review at the FCC. A Dish/Sprint deal would have to start with a fresh clock. Several officials observed that to the extent that regulators hope to see Sprint emerge as a strong counterbalance to AT&T and Verizon Wireless, a Dish bid means Sprint would be able to move more slowly than with the SoftBank investment. Officials said that then too, one of the selling points for SoftBank/Sprint is that it would bring to the equation the talents and experience of SoftBank CEO and founder Masayoshi Son, who has said he plans to play a big role in trying to make Sprint a more formidable competitor.

"This maneuvering adds another moving part to the equation, and that is likely to cause some delay for several reasons,” said a wireless industry lawyer not representing any of the companies involved. “First, Sprint shareholders have to consider the bid. That alone is enough to make the FCC pause to some degree. Second, if Dish becomes successful and wins over the majority of Sprint shareholders, then the commission would have to analyze it under a spectrum aggregation analysis, because Sprint holds spectrum. It’s used for DBS, but there still has to be the bona fide scrubbing of their spectrum holdings and how it is used.”

A Dish/Sprint combination will provide a unique ability across all platforms with some unparalleled capacity and exceptional scale and efficiency, said Dish Chairman Charlie Ergen Monday during a conference call. The Dish bid offers some things that SoftBank “just can’t bring to create a superior company,” he said. “We're bringing 45 MHz of unencumbered spectrum to the party,” and more than 14 million subscribers, he said. Because Dish is already in the U.S. subscription business, “we have plenty of assets in place,” he said. “Our offer is superior,” he said: It’s more cash by about $5 billion, more stock, and “Sprint shareholders will have 32 percent of a combined company of Dish and Sprint versus 30 percent of the current Sprint without the combination benefits of Dish.” The proposal will be evaluated by Sprint’s board “carefully and consistent with its fiduciary and legal duties,” Sprint said in a news release (http://bit.ly/15amXof).

To win in the mobile broadband business, “you need spectrum,” Ergen said. Low-band spectrum is needed, “because that’s the spectrum that’s going to propagate long distances,” and buildout costs are less expensive, he said. Sprint has the 850 MHz low-band spectrum, he said. Middle-band spectrum is needed where there is higher data usage in densely populated areas, he said. Sprint already has some spectrum there, “but Dish brings that 45 MHz of unencumbered spectrum for a new build that can be done very efficiently,” he said. High-band capacity also is needed, which is available with the Clearwire spectrum at 2.5 GHz, he added.

The need for a global standard is misunderstood, Ergen said. It’s important “because that’s what’s going to drive your efficiencies of scales on your devices,” he said. The Time-Division Duplexing Band 41 standard of the Clearwire spectrum “is going to be on a global scale dominated by China and India, and that’s going to drive device costs down,” Ergen added.

The move would be a better strategic fit than SoftBank combining with Sprint, said Mike Roberts, an analyst at Informa Telecoms & Media. Dish could combine its 2 GHz LTE spectrum with the LTE spectrum of Sprint and Clearwire, “which would be the foundation for a powerful new competitor in the U.S. telecoms market,” he said in a research note. If the deal is approved, Dish and Sprint could quickly offer TV, broadband and mobile bundles “to compete more effectively with larger integrated telecoms players such as Verizon and AT&T,” he said. Dish’s offer will likely force SoftBank to strengthen its offer if it wants to win Sprint, he added.

"Theoretically, the Softbank deal will be approved, and if Dish comes in that would be approved,” said a regulatory analyst. “What about the idea that you're two-thirds of the way there and somebody comes in with a sweeter offer and they may be highly leveraged, but they'll bring in video. ... Verizon and AT&T, but especially Verizon, have a huge lead in building out LTE.” Sprint would “lose eight, 12 months getting the deal done and they would be probably be highly leveraged if Dish did it,” said the analyst.

Free Press Research Director Derek Turner said Dish/Sprint should give regulators pause. “These Frankenstein-style mergers among weaker players are no substitute for real competition in the mobile, broadband and video markets,” Turner said. “They simply reflect the fact that policymakers have failed to foster competition in those primary markets. Until something is done about the market power that companies like Comcast, Verizon and AT&T abuse daily, consumers will be stuck paying higher bills for mediocre services. No merger at the bottom will do anything to change that reality."

The proposal would benefit competition in the wireless market, said Matt DelNero, a broadcast lawyer at Covington Burling, which doesn’t represent any of the companies seeking control of Sprint. “It strengthens Sprint as a competitor and strengthens Dish as a competitor,” he said. It’s a combination of existing spectrum assets, so it’s a little more complicated than SoftBank, he said. The 2 GHz asset from Dish is really a new one that the DBS company would be bringing to the table, he said. “It’s not the same review as when you have two incumbent carriers coming together.” The FCC would have more to look at with Dish/Sprint, because Dish spectrum would be combining with Sprint’s and Clearwire’s, DelNero said. The result of a spectrum aggregation analysis would likely be “to allow the Dish/Sprint combination because Dish is not an incumbent carrier,” he said.

The proposal will not create a new wireless competitor, said a satellite industry attorney not representing any companies involved in deals for Sprint or Clearwire. “It’s two current actors in the wireless realm, one of whom has terrestrial spectrum that they're supposed to build out, taking over a long-established wireless carrier,” he said. “It really doesn’t create any more competition, it just sort of consolidates the market further.” The larger focus will be on whether the transaction affirmatively harms competition, the satellite industry attorney said. Given the FCC’s precedent, “they'd probably only find it harmed competition in certain markets if they're aggregating enough spectrum that it really wouldn’t meet their screens,” he said.

Dish is “more strategically desperate for Sprint than is SoftBank,” said Stifel Nicolaus analysts in a research note. But “SoftBank certainly has deeper pockets,” they said. A combined Dish/Sprint “would have almost $36 billion in debt with a large portion of its revenue/EBITDA coming from the U.S. pay-TV industry -- one that we feel will be in decline from a subscriber standpoint” by the end of 2015, they said. Sprint appears to be in a solid position from a negotiating standpoint, they added.