Satellite TV veteran DISH Network (DISH +0.00%) is mulling over a merger with wireless phone network T-Mobile US (TMUS +0.08%) according theThe Wall Street Journal [subscription required]. If it comes to pass, this would be a game-changing deal for both of the industries involved -- and generally good news for American consumers.
Click here to read fellow Fool Dan Kline's take on what T-Mobile CEO John Legere could do for a combined company, and read on for my take on what Dish would get out of merging with T-Mobile.
The basics
First, let me paint the basic merger picture for you.
So far, the Journal's anonymous insider sources say that T-Mobile and Dish have agreed on some deal details, but not others. T-Mobile CEO John Legere has reportedly been tapped to run the combined company as CEO under the strategic leadership of Dish founder and CEO Charlie Ergen as chairman of the board.
It's less obvious how cash and shares might change hands in this rumored combination. The two companies are fairly close in size, no matter how you slice it:
|
(in billions of dollars) |
Dish |
T-Mobile |
|---|---|---|
|
Market Cap |
$34.5 |
$32.4 |
|
Enterprise Value |
$45.8 |
$52.9 |
|
Revenue (ttm) |
$14.8 |
$30.5 |
|
Operating Cash Flow (ttm) |
$2.6 |
$3.9 |
|
Total Cash |
$1.4 |
$3.0 |
|
Total Debt |
$14.4 |
$24.9 |
Data from Yahoo! Finance. ttm = trailing 12 months.
Between the two proposed partners, T-Mobile provides the larger money flows, but also the far heftier debt load. Neither company is in a position to make billion-dollar cash payments.
They also carry plenty of debt. Both companies carry speculative-grade credit ratings, which leads to higher interest rates on new loans. It would be difficult finding new loans or bond buyers at reasonable interest rates, no matter which company ended up technically acquiring the other one.
I'm convinced that this would be a pure stock-swap deal, with little or no cash incentive offered to either company's current shareholders. In my view, if it goes through, Dish investors and T-Mobile owners should each end up owning about half of the new company, with some wiggle room depending on whether the merger would be built around plain share prices, or the more nuanced enterprise values.
The Justice Department and the Federal Communications Commission have been giving the evil eye to big mergers in these industries in recent years, scuttling AT&T 's (T +0.33%) proposed $39 billion buyout of T-Mobile, and forcing Comcast (CMCSA 0.04%) to withdraw a $45 billion bid for Time Warner Cable (NYSE: TWC). But both of these failed megamergers involved the largest player of its industry trying to build an even larger lead over everyone else. They were simple pick-me-ups, staying strictly within their core markets.
If T-Mobile merged with Dish, you'd get cross-pollination between the telecom and television markets. Neither company offers services in the other one's wheelhouse, so nobody would be fortifying a dominant or monopolistic market position. Moreover, Dish is far smaller than Comcast or Time Warner if you're looking at the entire TV service industry, and isn't even the largest satellite service provider. Likewise, larger competitors still run rings around T-Mobile, though the Magenta uncarrier is growing faster than any of its industry peers.
For these reasons, I don't see a TMUS/DISH merger being halted by regulatory roadblocks.
Dish founder and CEO Charlie Ergen. Image source: Dish.
What's in it for Ergen?
If this merger idea surprised you, I'm afraid you're just not paying attention.
T-Mobile has been open to merger talks with several different partners in recent years. None of these ideas have run the course yet, but it's clear that T-Mobile could use a bit of additional business scale and increased cash reserves.
And Dish is openly drooling over the prospect of starting a whole new TV service that's built on Internet protocols over land-based wireless networks. Charlie Ergen bid on both Clearwire and Sprint (S +0.00%) in 2013, but ultimately lost both bidding wars. Merging with T-Mobile would finally fill that empty space in Ergen's business ambitions, setting the stage for a nationwide IPTV service rollout. And the moment that AT&T's T-Mobile bid evaporated, he actually said that T-Mobile could become a Dish partner.
The big idea behind moving Dish onto tower-based wireless networks and Internet technologies is pretty simple. Satellite broadcasting just can't do all the things an IPTV service can. The modernized service would provide two-way communications and on-demand video streams, tie into other online content and data providers, and be easy to upgrade when wireless data communications take their next evolutionary step. The first 4K video broadcasts, for example, didn't arrive in American homes via satellite dishes or cable TV networks. They came from streaming video services based on bog-standard Internet technologies.
Installing networking equipment in rented tower spaces can be expensive, sure, but the same is true for satellite launches. And when your data signal equipment in a land-based tower breaks or becomes obsolete, you can fix or replace it. Try doing that to a satellite in geostationary orbit, some 22,000 miles above ground.
In short, Charlie Ergen wants a modern TV network for the long haul, and satellite signals just can't provide that. Dish already owns a plethora of wireless spectrum licenses, thanks to buyouts of two bankrupt wireless businesses in 2011, plus some controversial wins in the FCC's latest spectrum auction. Throwing T-Mobile into the mix would not only diversify Dish's business operations, but also set the stage for a serious land-hugging TV service that's built for the very long haul.
That's a great way to manage Dish for the long term, and also would add a brand-new TV service alternative to an American market that's starved or real options. Going down this road could only increase consumer choice and lower prices during the coming years, because that's what honest competition tends to do in the open market.
