Is It For Sale?

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dishThere have been rumblings for a few months about Dish Network selling their spectrum to Verizon. In June, The Wall Street Journal reported that Citigroup analyst Michael Rollins told them, “We increasingly see two options for DISH: buy T-Mobile US or sell to Verizon.” While a Dish/T-Mobile merger could still be possible, Jonathan Chaplin of New Street Research thinks that it’s time to focus on Dish and Verizon. “Verizon seemed to shift their tone on Dish’s spectrum last week, which we think potentially sets up a transaction between now and year end,” Chaplin wrote. Dish is now cheaper than it was before the AWS-3 auction in January. At the Goldman Sachs 24th Annual Communacopia Conference last week in New York, Verizon CEO Lowell McAdam explained, “So [Dish] can be a great business, but it doesn’t need to be part of Verizon. The spectrum that [Charlie Ergen, Dish’s Chairman of the Board] has, we have had discussions about how we can provide him megabytes and he could pay for it with spectrum. Those sorts of options are still open to us. But to get the spectrum by buying the entire company isn’t something that we are interested in.”

With that statement, Chaplin believes the shift in tone is significant. “Verizon management is generally careful about their messaging,” the analyst explained. New Street Research says that 600 MHz spectrum is not ideal for Verizon or AT&T, which is what will be auctioned off in March. The two carriers have low-band spectrum and are in need of more mid or high-band spectrum. Chaplin advised that if Verizon is interested in buying Dish’s spectrum, they should explore that option before the auction. However, the firm noted that Verizon is levered at their threshold of 2.5x, and it will be difficult for them to pay cash to buy the spectrum, which is valued at $63 billion. “If purchased for cash [it] would add 1.4x turns to Verizon; if they purchased just the AWS-3&4 it would be worth $53 billion adding 1.2x turns. If they used stock it would be 34% dilutive (29% just for AWS-3&4). This has been the stumbling block to a transaction, in our view. One way around this would be a very long term lease with a right of first refusal if the spectrum is ever sold,” Chaplin said.

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September 24, 2015 |
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