Dish Launches $25.5B Bid for Sprint that Can Lead to Unique Services
By Tony Rizzo
Dish Network Corp. – and its founder and chairman Charles Ergen – wants, more than anything else, to become one of the nation’s triple play kings, with the ability to offer video, Internet and phone services to both existing customers and a large target of potentially new subscribers.
Meanwhile, it keeps on trying to edge its way into the pure wireless telecom space inhabited by the big boys. The company has bought up large amounts of spectrum to this end. Its most recent effort on this front has been its widely publicized and failed attempt to wrest Clearwire from Sprint.
The company has also won important approval from federal regulators to use its spectrum to offer land-based mobile-phone service.
Early this morning, Dish and its chairman once again demonstrated their strong desire to remain in the game – only this time Dish has set its sights much higher by putting in a bid to acquire Sprint itself. The emerging bid details – per the Wall Street Journal – has it that Dish will offer Sprint shareholders a 13-percent richer deal, at $25.5 billion, than the $20-billion deal Softbank and Sprint have already agreed to back in mid-October 2012.
Since that deal was announced, Sprint has also worked out acquiring the remaining pieces of Clearwire it didn’t already own.
Charles Ergen started Dish (formerly EchoStar Communications) in 1980. At that time it sold C satellite TV dishes to rural homes in Colorado. The current Dish Network was born in 1996, and is now a fast growing and well-known direct-to-home satellite television company. Playing with the telecom big boys and looking to offer additional and alternative sources to the big four (or big two and little two depending on how you might want to call it) – especially in areas where they lack service delivery capabilities – makes sense to Dish.
Whether or not it is something the company can turn around in a profitable way relative to swallowing such a huge deal relative to its own size is highly questionable. The deal Dish is expected to formally put on the table for Sprint calls for Dish to pay $4.76 in cash and about $2.24 in Dish stock for every share of Sprint. Those numbers are based on Sprint’s $6.22 closing price last Friday.
Softbank’s own offer (check out our earlier article noted above for those deal details) contains a number of complicated moves, including a $3.1-billion bond-based cash infusion that would be convertible to Sprint shares at only $5.25/share.
The proposed and unsolicited Dish deal (we need to make clear that the deal has only been presented to Sprint in the form of a letter to the Sprint board early this morning) is straightforward compared to the Softbank deal. Perhaps the biggest difference between the two is that the Softbank deal offers Sprint a way to grow as “Sprint,” while the Dish deal is far more likely to benefit Dish than Sprint itself.
Unlike the billions of dollars in deal breakup fees AT&T had to shell out to Deutsche Telecom when its deal with T-Mobile fell apart, there is only a $600-million deal breakup fee associated with Sprint-Softbank. Dish is more than willing to cover the cost of the breakup fee – any deal would need to deal with this and Dish has made it a non-issue as part of its proposed offer. But we need to also keep in mind that Sprint would bring with it the Clearwire spectrum that Dish so “clearly” desires.
In sum, the $600 million is well worth paying out.
Sprint and Dish Synergies and Opportunities
Here’s the darker side of the deal for Dish: Sprint had $35.3 billion in revenue last year; Dish posted $14.3 billion in revenue. That’s a substantial difference. More important to consider, a merger between the two would result in the combined company owning $36 billion in debt. That doesn’t include up to $9 billion that Dish would look to borrow to finance the deal.
Ergen and Dish clearly believe there is a mountain of revenue to be unearthed from the combination – in large part because of the different synergies each company would add to the other.
There’s a lot of truth to this; Dish’s satellite capabilities (along with 14 million subscribers) combined with Sprint’s existing (and quickly improving) wireless networks, offers uniquely complimentary capabilities and potentially new services that Dish can easily monetize. Dish’s track record of growth is undeniable – we believe it would be able to deliver on the necessary management at the highest levels to indeed tap the “out-of-the-box” dollars that are out there to be tapped. Barclays is serving as an advisor to Dish.
As well, and as noted by the Wall Street Journal, Dish has call centers, back-office staff and equipment installers that when combined with Sprint’s will likely deliver cost savings that cannot be had through the Softbank deal. This would make the deal’s debt load that much easier to swallow over time. We don’t really yet know any of the financial institution-related details yet in terms of Dish’s financing, but we suspect Dish already has this end of it lined up and well thought out.
We must confess that we like this deal. It is far cleaner than the Softbank deal would be. It keeps the entire company within the United States, and even if Sprint becomes a consumed entity under Dish rather than remaining independent, it’ll likely have better chances to prosper through the unique synergies that a Dish-Sprint deal can uncover.
Finally, the deal is likely to provide more cash resources than the Softbank $3.1-billion bond offer – without the longer term ability of Softbank to then buy Sprint shares at $5.25 per share.
Will Softbank let such a deal happen? Our sense of the Softbank financing is that Softbank was already straining to deliver on the deal it put on the table. Will it be able to offer a substantial sweetener to make the deal a better offer than Dish’s? That is a good question.
But our initial take on this is that the deal isn’t all about tiny differences in ultimate per share price. The agreement really needs to be about unlocking opportunities – the Dish deal appears to us to be one that would create those opportunities – and ultimately deliver a great deal more shareholder value.
We look forward to Sprint’s response.
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