The FCC's auction of the mid-band AWS-3 wireless spectrum recently came to a close with winning bids totaling $44.9 billion. Four companies did most of the spending, including three of the four major wireless carriers -- AT&T (NYSE:T), Verizon (NYSE:VZ), and T-Mobile (NASDAQ:TMUS). The fourth big bidder was DISH Network (NASDAQ:DISH), which did its bidding through small businesses it owns stakes in and which qualified for a 25% discount.
Dish Network's presence in the auction is largely what drove license prices so high. Before the auction, analysts were expecting the spectrum licenses to fetch a total between $10 billion and $20 billion. AT&T alone ended up spending over $18 billion.
How Dish drove bidding higher
Dish used two companies, Northstar Wireless and SNR Wireless, to place bids on spectrum licenses. Dish owns an 85% share of each business, and both businesses qualify as "designated entities," which the FCC established in the 1990s to ensure spectrum licenses are awarded to entities controlled by women, minorities, and small businesses. Dish Network is clearly none of those.
But it's a strategy that has been employed successfully by AT&T and Cingular in the past. So, while there's a lot of controversy around the strategy, the FCC will likely be unable to avoid providing the 25% discount for designated entities.
That 25% discount allowed Dish to be more aggressive than the wireless carriers in its bidding. In fact, Dish was reportedly active into the late bidding rounds of 19 of the 20 most expensive licenses. Often times, Northstar and SNR would bid against each other to continue driving prices higher.
It was an incredibly successful strategy, forcing AT&T and Verizon to spend $18.2 billion and $10.4 billion, respectively, for their licenses. Even T-Mobile spent more than anticipated, spending $1.8 billion for select licenses to fill in its already robust mid-band holdings.
For Dish, however, making the wireless companies spend more on spectrum only increases the value of its current mid-band spectrum holdings. T-Mobile also holds a large amount of similar spectrum licenses, which have become extremely valuable thanks to Dish's willingness to spend.
Dish's current spectrum holdings
In addition to the 702 spectrum licenses the company just purchased at auction, Dish has built up quite a portfolio of spectrum licenses over the last few years. The FCC approved Dish's plan to use satellite spectrum it purchased for $2.8 billion in 2011 for terrestrial use, instantly supplying the company with 40 MHz of mid-band spectrum dubbed AWS-4. Dish also spent over $1.5 billion on 10 MHz of spectrum in the 1900 MHz band in February of last year. Overall, Dish has spent $10.5 billion on spectrum since 2008.
Based on the prices AT&T and Verizon paid at auction, Dish's existing spectrum holdings as an asset have appreciated handsomely. The average price at auction was approximately $2.71 per MHz-pop for paired spectrum.
Even at $2 per MHz-pop, Dish's licenses totaling around 17 billion MHz-pop would be worth about $34 billion. Adding in the $10 billion in spectrum licenses the company just acquired, its spectrum holdings are worth approximately $44 billion. Meanwhile, its enterprise value is just $37.5 billion.
T-Mobile is also undervalued compared to its large swath of mid-band spectrum holdings. That has fueled speculation that Dish may be interested in acquiring or merging with the company since it's required to service 40% of the population covered by its spectrum holdings by 2017. But after spending $10 billion on new spectrum licenses, Dish probably isn't interested in buying anything else for a while.
What will Dish do?
It's unlikely Dish plans to acquire T-Mobile, and Dish Chairman Charlie Ergen has indicated he has no interest in selling its spectrum licenses. That's a smart move considering those licenses are expected to continue appreciating in value over time.
The likeliest move to avoid forfeiting the licenses and incurring fines is to license the spectrum to AT&T or Verizon. Dish reportedly spent the most in areas where the two largest carriers are capacity-strained, essentially forcing AT&T and Verizon to look to license spectrum they were unable to buy outright.
Analysts project that Dish's entire wireless spectrum portfolio could generate $10 billion in licensing revenue per year. That's a pretty good return on investment.