Evaluating Dish's Offer for Sprint

TheStreet.com

NEW YORK (TheStreet) -- Dish Network CEO Charlie Ergen continues to play the potential spoiler role in wireless operator consolidation moves.

Dish first tried first to disrupt the deal between Sprint and Clearwire by offering $3.30 a share for Clearwire's outstanding stock instead of the $2.97 price offered by Sprint. Since Sprint owns more than half of Clearwire, and the latter has already accepted financing from the carrier, there is only a small chance that Ergen's bid would be successful in that instance.

Today, Dish topped a Softbank Corp. offer for Sprint by offering to buy 68% of Sprint for $25.5 billion, countering the Japanese carrier's bid of $20.1 billion for 70% of Sprint. The strategy is clear as Dish wants to embark on a transformational play as a quad-play provider, offering nationwide bundles of in and out-of-home voice, video and data services via an extended broadband network that would leverage its combined cable and wireless assets.

Frost & Sullivan's research clearly indicates a positive correlation between subscriber stickiness and the amount of services offered in a bundle: The higher that number is, the less likely a user is to move away from that service provider. But one of the key elements of that bundle is wireless service, with subscribers being more likely to switch bundles in order to obtain the mobile service they desire.

Based on this, Dish's offer for Sprint makes perfect sense, as it will be able to offer a quad play of video, high speed data, wireless and voice (as a VoIP, over-the-top type service).


Dish has amassed a significant cash reserve to the tune of $10 billion, which would be used to make about roughly 68% of its $7-per-share offer for Sprint. The other 32% would come in Dish stock, with the company also assuming some debt. The total represents a 13% premium on Softbank's bid.

Ramifications:

The Dish bid for Sprint is not conditional on the Clearwire acceptance of the Sprint offer, so there shouldn't be any hurdles to be faced on that particular aspect. That said Clearwire's 2.5 GHz spectrum holdings can play an instrumental role in the new Dish/Sprint company.

From a regulatory standpoint, the Federal Communications Commission stipulates that Dish will have an obligation to cover at least 40% of the population in areas covered by its spectrum with a wireless network within the next four years, and at least 70% of the population within the next seven years.

It remains to be seen whether the ongoing deployment of Sprint's LTE network will be impacted by all this speculation. This remains a top priority for the carrier, irrespective of what happens at the corporate level, but it is almost impossible to shield these rumors and completely prevent them from impacting the planning and rollout.

Vendors such as Alcatel-Lucent, Ericsson and Samsung (the suppliers of Sprint's RAN - Radio Access Network) might experience temporary/slight delays in capital spending as a result, but I do not anticipate those delays to be significant.


The key is how the Sprint board will react to this as the Dish offer, while better, comes with a heavy debt burden: the two combined companies would have more than $36 billion in debt, prior to tacking on more money that Dish would have to borrow to get the deal done, probably in the vicinity of $9 billion, making it a total of $45 bilion, which is a heavy toll.

More than likely, Sprint will use this as leverage to get Softbank to increase its offer, which it can do, since it has a superior balance sheet compared to Dish. Now we will be able to see how intent Softbank is in its U.S. expansion plans and whether it will up the ante in the pursuit of Sprint.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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