Over the last several months, the merger between telecoms T-Mobile US (NASDAQ:TMUS) and Sprint (NYSE:S) has been inching along through a variety of legal hurdles. Several state attorneys general are still arguing in court that the merger should be blocked, as it would further consolidate power in the industry, reducing competition and potentially hurting consumers. A federal judge will likely rule on the case in the next few weeks.
The most affected investors are likely those holding Sprint stock (which has seen a price fall of some 40% over the last six months). But the biggest winner of the deal may actually be DISH Network (NASDAQ:DISH). As part of the merger agreement, Sprint's prepaid business and some wireless spectrum will be sold to DISH. By taking over Sprint's assets, DISH will be in a good position to expand from a media-content provider into a diversified provider of media and telecom services, in the same league as AT&T.
While still uncertain, signs point to the merger between T-Mobile and Sprint eventually going through. When that happens, DISH will effectively catapult itself from a satellite-TV provider operating in a slow-growth market into a diversified communications company competing as a major contender in the faster-growing national wireless market. Furthermore, DISH will be categorized not as a stock in the media and entertainment sector, but rather into a new, bigger, broader investing sector: communication services. This new classification, developed by investment outfits like MSCI and S&P Dow Jones, accounts for 10.4% of the S&P 500 (compared to 2.8% for telecom) and significantly opens up interest from deep-pocketed groups of interested investors. That's good news for DISH.
Punching above its weight and now a national contender
DISH Network has long been planning to make the leap and become a national wireless carrier. As part of the merger deal announced in 2019, Dish will buy the Sprint mobile brands, Boost Mobile and Virgin Mobile, as well as pay $3.5 billion for a portion of T-Mobile's spectrum licenses. Prior to the agreement, DISH did not offer cellphone service; with the deal, DISH inherits 9 million new prepaid wireless subscribers. From Sprint, DISH will acquire 14 MHz of its 800 MHz spectrum for $3.6 billion within three years. In addition, T-Mobile will be required to offer access to its wireless network on a wholesale basis to DISH for a period of seven years, in order for DISH to strengthen its market presence and provide more competition and choice to consumers.
The new assets will certainly put DISH in a highly competitive position. The 800MHz wireless spectrum is low-band and designed for better building penetration and coverage. The new 800MHz spectrum will also work perfectly with DISH's current 600MHz and 700MHz low-band spectrum. More spectrum band and better coverage will only strengthen DISH's ability to grow subscriber numbers beyond Sprint's present levels. Some 400 Sprint employees will be transferred to DISH, along with the use of Sprint's nationwide network of 7,500 retail outlets.
"New T-Mobile" will also give DISH Network access to up to 20,000 of its decommissioned cell sites by 2023. To make certain those sites are available to the consumer market, DISH will be required to build additional sites, and commit to covering 70% of the national market with 5G broadband service.
By taking on these assets to create a fourth U.S. presence in the wireless sector, DISH demonstrates far greater ambitions than your average satellite-TV provider. Over the last decade, DISH has been steadily spending to build a bare-bones 5G network, using spectrum rights it acquired in periodic acquisitions. Building up telecom assets that produce no actual revenue shows how determined -- or foolish, depending on how you look at it -- DISH has been to become a major contender.
DISH Network co-founder and chairman Charlie Ergen has often told analysts about his grand plans to build capacity, compete against the incumbent national wireless players, and become a contender in 5G. Ergen has long been aware that the satellite-TV market is facing tough times. Horizontal expansion into better, hotter markets is essential for DISH. Since 2010, Ergen has spent billions amassing wireless spectrum in various acquisitions to assemble the new business. Getting all of its telecom assets up and running will also eliminate a regulatory concern that has been hanging over DISH. If the spectrum it currently controls continues to go unused, DISH risks losing its license from the FCC (Federal Communications Commission) to operate the spectrum.
Last November, to finance the acquisition of new telecom assets, DISH announced a rights offering to raise proceeds of approximately $1 billion. The proceeds from the rights offering, as well as anticipated proceeds from new common stock, are intended to be used for investments in the wireless business.
A new classification and a new era
A third-party content provider like DISH Network can aggressively leverage the complex synergy between media and telecom. The years-long rollout of 5G wireless services, and the new services that rollout makes possible, create an environment where virtually every smartphone subscriber in the U.S. can generate revenue for both the telecom business and the media business. And DISH wants to be one of the few communication-services conglomerates positioned across sectors, so it can tap into that combined revenue stream.
By integrating and growing Sprint's telecom assets, DISH could be able to stream and monetize content over every screen in America -- whether TV, laptop, tablet, or phone. DISH recognized the potential of cross-sector horizontal growth when it launched Sling TV, one of the first "over the top" internet TV providers that began the trend of cord-cutting: eliminating all subscriptions to broadcast TV, in favor of internet-delivered content. The cord-cutting trend presented an existential threat to traditional cable-media providers. But for DISH, internet TV was the beginning of a new era of innovation, opportunity, and growth.
After acquiring Sprint's assets, DISH will likely have more opportunities to grow top-line revenue and income by strategically acquiring even more telecom operators.
Sprint is only a first step
The media and telecom industry is undergoing enormous disruption in technology and demographics. The consumer market is slowly moving away from traditional media providers, and is fanning out to access content through a myriad of channels. Taking over Sprint's assets allows DISH Network to expand far beyond the confines of the satellite-TV market. More significantly, DISH will make the first aggressive step into a consumer media market that combines a complex mix of telecom, content, and broadcasting.
Netflix (NASDAQ:NFLX), similarly, was one of the very first hybrid media companies that saw the long term potential in the synergies between telecom, internet, and digital content. Netflix is now competing against traditional broadcasters and Hollywood studios as a major content creator. However, it may still be some years before those synergies deliver hard results, and for the stock market to fully understand the potential of Netflix's unusual hybrid model. Netflix stock underperformed the market for its first decade of existence, but since 2010, Netflix stock has rocketed up by over 4,200%.
DISH Network stock may not launch into orbit the way Netflix stock did, but its growth potential makes it a good long-term hold. With this merger deal, DISH will likely emerge as an eventual winner in the complicated and broad new industrial sector of communication services.