Dish Network Corp.’s (DISH) dramatic $25 billion bid for Sprint Nextel Corp. (S) is a loud noise made when the unlimited bumps against the finite.
Growth in data transmission is unending, but the wireless spectrum available to handle it is constrained. Demand for an expanding variety of media content is boundless, yet any one company’s ability to deliver it is hindered by regulatory impediments and competitive habits.
Founder and CEO Charlie Ergen built Dish from nothing in 1980 to the third-biggest pay-television operator, with 14 million subscribers to its satellite-based broadband network. Yet he has long been clear about his view that the basic pay-TV business is in the process of being upended by consumers’ increasing willingness to grab entertainment content online wherever they are, a la carte or free of charge, through powerful mobile devices. A cheaper all-in-one, go-anywhere media and communications solution has seemed, to him, the best way both for his company to thrive and for customers to get what they want.
Acquiring Sprint – which is under agreement to sell a 70% stake to Japan’s SoftBank Corp. (SFTBY) - would allow Dish to fold nationwide cellular services into its broadband packages encompassing wireless voice and data, plus in-home TV and Internet. Sprint also owns valuable wireless spectrum that can be put to use in delivering the full array of mobile data and content.
As Dish wrote to Sprint’s board: “"We will be the only company able to offer a fully-integrated, nationwide bundle of in- and out-of-home video, broadband and voice services to meet rapidly evolving customer preferences." (In 20111, Dish picked up Blockbuster’s digital video assets to build its content pipeline.)
This is less about the value of Sprint as a wireless brand, where it suffers in comparison to Verizon Wireless and AT&T, than about its network assets. Dish itself has been buying up as much unused spectrum as it can find in recent years, an effort that Ergen has promised was following the arc of a Seinfeld episode: For most of the episode it’s unclear where all the plot strands are headed, but are knitted together in the final two minutes.
Under regulatory rules, Dish must launch a cellular service for the 70% of the U.S. covered by its spectrum within seven years or lose use of the spectrum. That left Ergen with a choice of either buying or building a wireless business; he’s elected to try and buy one.
Sprint has valuable spectrum of its own. In addition, its 51%-owned Clearwire Corp. (CLWR) is the seventh-largest cellular network in the country, boasting enviable 4G capacity. Sprint is due to buy the other 49% of Clearwire for $2.97 a share. Dish has already been trying to get in the way by offering $3.30 a share for Clearwire. Dish today said if it acquires Sprint, it would pull its Clearwire bid and honor the terms of the exiting Sprint-Clearwire deal.
David Steinberg, who runs value asset manager DLS Capital, says Clearwire’s spanking-new 4G network and idle spectrum could be the main jewels at stake in all this. Steinberg, who owns Clearwire and formerly held Sprint shares as well, believes Sprint CEO Daniel Hesse has possibly undermined his own aims by trying to buy the remaining Clearwire stake on the cheap, taking advantage of Clearwire’s groaning debt burden and Sprint’s blocking position.
Hesse seemed to have put together an attractive deal under the SoftBank arrangement, having the deep-pocketed Japanese partner fund heavy capital investments in its network, buying in the valuable Clearwire stake, leaving himself in charge and allowing 30% of Sprint to trade as a publicly traded “stub." But in trying to get it all, Hesse might have left Clearwire and Sprint vulnerable to an aggressive strategic buyer.
In some respects, Ergen’s urgency to round out his media-delivery offerings comes from the long-term vulnerability of the pay-TV business model.
“As stocks, pay-TV operators as a whole will struggle to get any type of [price/earnings] multiple expansion with over-the-top video becoming reality,” says Brad Gastwirth, analyst and co-founder of research boutique ABR Investment Strategy, citing consumer’s pulling content piecemeal from the likes of Netflix Corp. (NFLX) or Amazon.com (AMZN) outside of standard bundled cable and satellite packages.
“A Dish/Sprint combination gets the company closer to being a leading home entertainment company via TV, phone and media streaming," Gastwirth says. "Adding a mobile operator along with their Blockbuster assets, gets Dish into a much more interesting area. This at least diversifies the company and time will tell if they are able to execute on this new ambitious strategy.”
Ergen, a former professional card player who is revered in the finance world for his long-term vision and capital-allocation acumen, has offered clues that this is where’s he’s been heading for a while.
In this long interview from February at an AllThingsD conference, Ergen said: “In most cases it’s better for the consumer to pay for content one time and then use it wherever” he or she wants. “We’d like to own a wireless network so we can give the quality of service” demanded by go-anywhere applications.
It’s hard to handicap how this multi-front battle will play out from here. Sprint’s board must weigh the higher nominal value of Dish’s proposal against its existing, more secure agreement. Dish has stated that it expects to be able to finance the cash portion of its bid in part with new debt – and this is likely true – but it is not a fully funded offer yet.
And, as with all things telecom and media-related, regulatory intricacies are crucial. Various permissions for transfer and usage of spectrum are in play, and it’s unclear whether U.S. regulators might prefer that a domestic wireless carrier remain in the hands of a domestic owner, rather than 70% controlled by a foreign company.