When DISH Network (NASDAQ:DISH) used a discount meant for small businesses to purchase wireless spectrum at the most recent federal auction, it seemed a little shady.
This was one of those cases where a smart company exploited a loophole that it should never have been allowed to. Once the public heard what happened, the small amount of people who follow wireless spectrum auctions called foul, but it did appear that technically DISH operated within the rules.
The action always seemed a little shady -- an attempt to exploit a loophole for stupendous gain -- but at first it looked like the company was going to get away with it, saving $3.3 billion and putting one over on Uncle Sam, not to mention the rest of the wireless industry.
Now, however, it seems like the Federal Communication Commission plans to change the rules and disallow the discount. That's a win for taxpayers and a huge blow for DISH which could impact its merger discussions with T-Mobile (NASDAQ:TMUS).
What did DISH do?
The company made $13.3 billion in winning wireless bids at the most recent FCC wireless spectrum auction. The bids were not made directly through the company and were instead routed through shell companies which DISH controlled. Because the actual entities doing the bidding were technically "small businesses" by the FCC definition, they qualified for $3.3 billion in discounts.
That did not sit right with FCC Commissioner Ajit Pai who immediately called for an investigation.
"[T]wo companies in which Dish Network has an 85% ownership stake claimed over $3 billion in taxpayer-funded discounts when purchasing spectrum in the AWS-3 auction," Pai said in his call for an investigation. "Those discounts came through the FCC's designed entity program, which is intended to make it easier for small businesses to purchase spectrum and compete with large corporations. Dish, however, has annual revenues of almost $14 billion, a market capitalization of over $32 billion, and over 14 million customers. Its participation makes a mockery of the DE program."
What the FCC is doing
The federal agency has decided to reject DISH's use of the discounts, according to The Wall Street Journal. After reviewing the sale, FCC staff decided that the company's actions "violated the broad spirit of the auction's rules," according to the paper.
DISH has not commented on the purported ruling but has repeatedly said that it did not break the rules. The company has also cited that other companies have exploited the same loophole in previous auctions.
If the FCC officially denies use of the discount, DISH will not be able to walk away from the deal. It will be on the hook for the full $13.3 billion purchase price.
The FCC has released new rules that put a $150 million cap on the small business discount, but those rules do not apply retroactively. In addition, the agency will no longer allow coordinated bidding between related parties which was previously permitted as long as it was publicly announced.
What happens next?
Given the amount of money on the line here, DISH will almost certainly take any FCC ruling against it to court. Should that happen a settlement appears likely because the agency may not have the legal authority to stop a company from exploiting a loophole it created, especially when there is past precedent of companies doing the same thing.
DISH pulled a fast one here and the FCC was right to call foul and make it impossible for other companies to do the same thing in the future. Still, it seems equally shady to change the rules after the fact. Forcing DISH to spend an extra $3.3 billion puts the company in a precarious position and almost certainly puts any deal with T-Mobile in jeopardy.
This is a case where cooler heads should prevail. DISH played it fast and loose with the rules, but it did not technically break them. The FCC should find a way to punish that through making a settlement deal without simply going back and changing the rules.
Daniel Kline has no position in any stocks mentioned. He is looking for a $3.3 billion loophole, but has yet to find one. The Motley Fool recommends Twitter. The Motley Fool owns shares of Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.