Is DISH Dependent on a Dovetail Deal?

DISH Network (NASDAQ: DISH  ) looks like it might be in a tough spot. After a foiled takeover attempt of Sprint and an unsuccessful bid for Clearwire, the company might need to quickly find a synergistic partner if it wants to maintain its current market price. Wall Street seems to have nearly fully valued the two parts of DISH's business, its core satellite-TV operation and its potentially valuable wireless spectrum assets, so that the company is now obligated to realize the maximum out of those pieces. An augmentative merger or acquisition may be the only way to do it. But is such a deal available?

The market's current take on DISH
DISH's satellite-TV operation, with around 14 million U.S. subscribers, is its main business. Unfortunately, it's not as appealing as it once was. The viewer marketplace is saturated and offers limited growth prospects. The business also faces burgeoning competition from online access and soaring programming costs. In the last quarter, the company's sales increased a meager 1.1% from the prior year, while the subscriber count dropped around 78,000 with adjusted profits falling about 5% due to higher programming fees. 

Using competitors such as Time Warner Cable as a comparison, DISH's lackluster satellite-TV business appears to be worth roughly $13.8 billion, or $30 per share. This is based on a cash earnings of $1.53 billion and a market capitalization multiple of 9. Given the stagnant nature of the venture, a synergistic merger might be the only way to create significant additional value.

While its core operation is pretty mundane, DISH's wireless spectrum holdings are much more interesting. As wireless data use grows, additional bandwidth becomes increasingly precious and DISH was prescient enough to pick some up early. In 2008, the company acquired certain 700 MHz wireless licenses, and in 2012 it acquired an additional 40 MHz of 2 GHz spectrum.

It looks like this spectrum makes up a meaningful part of DISH's market value with a possible worth around $9 billion, or about $19 a share, based on comparable wireless transactions and published estimates. Since these wireless licenses have a use-it or lose-it nature to them, DISH needs to commercialize or monetize them in a timely manner. Developing a proprietary network is an expensive and daunting task; thus, finding a willing wireless partner or acquirer seems the most fruitful path to get full value from these assets.

What deals would justify DISH's full value?
DirecTV (NASDAQ: DTV  ) , a leading provider of satellite-TV with over 20 million subscribers in the U.S. and over 16 million customers in Latin America, would certainly be a good partner for DISH. While a deal wouldn't handle the spectrum issue, it would create some significant synergies. The combination could offer meaningful cost savings from rationalizing administrative expenses, may offer better negotiating clout in dealing with programmers, and potentially improve the ability to increase pricing.

Though a DirecTV/DISH merger looks to be a great fit, there are some significant obstacles that might make a deal unlikely. First, DirecTV may not want to pay up for DISH's wireless assets. Especially since their ultimate use would still be unresolved. An all cash deal, in the range of $20 billion, is probably too imposing and a stock deal might not be that attractive given DirecTV's slightly undervalued shares. The company's fair value looks around $70 per share based on 9 times cash earnings of $4.3 billion.

The likelihood of government opposition is also a huge roadblock to such a transaction. The FCC and Justice Department opposed a proposed merger of DISH, then known as EchoStar, with DirecTV in 2002. Their worry that such a combination would reduce competition in the television service market, in particular for rural customers, probably hasn't diminished.

T-Mobile US (NYSE: TMUS  ) , the fourth-largest U.S. wireless service provider with about 44 million wireless subscribers, might be a more likely DISH partner. T-Mobile is clearly focused on gaining market share and could definitely use additional bandwidth. Thanks to innovative pricing plans, mobile device financing, and increased 4G coverage, the wireless provider reported strong customer growth of 1.1 million net additions in its latest quarter. To keep up with this surge, the company recently announced an agreement to purchase spectrum from U.S. Cellular.

But this union also has its hurdles. It's not likely that T-Mobile would want to acquire DISH in its entirety just for the spectrum. A stock-based merger of equals is also not probable since Deutsche Telekom, T-Mobile's parent, would not wish to have their control diluted and thus be further from an agreeable exit strategy. That leaves DISH having to buy T-Mobile, a very expensive proposition.

Given that T-Mobile purchased MetroPCS for an enterprise value (EV), or stock market value plus long-term debt, of around 1.77 times revenue or roughly $1,000 per subscriber, and the recent AT&T purchase of Leap Wireless went for around 1.32 times revenue or $845 per subscriber, an EV offer of around 1.65 times revenue or nearly $950 per subscriber would probably be necessary to get T-Mobile's attention. This deal, in the $40 billion to $42 billion range, might be too big for DISH even with its war chest of around $9 billion in liquid assets.

Conclusion
DISH might be in a tough spot. Wall Street seems to be very optimistic that the company can realize the full value of its satellite-TV business and spectrum assets, but a synergistic merger or acquisition might be the only thing that can fulfill this faith. While there are possible deals out there, it is unclear if any would be able to overcome the obstacles that would nix such a transaction.

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