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DISH's Ergen Taking Bets on Wireless Hand

Parsing the dynamic between a hugely ambitious wireless project and DISH's track record of discipline and innovation is the crux of DISH's valuation. When thinking about the company as an investment, Cooperman and many research analysts appear to divide DISH in two, and for good reason.

Ergen and his team have built a 14 million-plus user strong TV distribution network that competes with larger DirecTV (DTV) for supremacy of satellite airwaves and gushed out roughly $2.5 billion in free cash flow last year.

Calculations of DISH's valuation face risk on two fronts. DISH's satellite service faces the competitive threat of smart phones pulling users into bundled wireless, TV and Internet services offered by the likes of Verizon and ATT, a trend which may only escalate. In December, Verizon and Comcast (CMCSA) entered into a partnership that may increase their respective bundled TV and wireless offerings that compete against DISH, which is struggling to benefit from the rise of smart phones. DISH is also fighting its content providers like AMC Networks (ACX) on carriage costs.

The value of DISH's wireless assets -- which some have already priced into its stock -- could change were Ergen to try and actually build a network. "My perspective is that I think DISH will benefit from industry consolidation and I don't see them building out the spectrum," says Bryan Kraft of Evercore Partners, adding, "That's why I am valuing the assets the way I am." Kraft is also more confident in Ergen's economic reasoning than he is in the mobile broadband logic that underpins DISH's wireless effort.

After acquiring 40 megahertz frequencies from bankrupt industry players DBSD and TerreStar for a combined $3 billion in recent years, DISH's wireless assets are worth an estimated $15.40 a share after tax, according to Kraft, were the company to sell or partner with a carrier. That compares with a core business worth $22 a share after accounting for debt, according to Kraft, who values DISH at $40. DISH's current share price is just above $30.

Discount broadband providers like Charter Communications (CHTR) would likely offer faster internet than any service DISH could build, meanwhile, the company indicates it will wait for LTE in any wireless network build, putting it years away, according to Kraft.

Still, what makes Ergen's wireless play so intriguing is that he is likely holding the best unused wireless hand of any current or prospective industry player. The question is whether he will play his cards correctly after others have failed. Investors don't need to decide on their own -- they need only join Ergen, who has the most skin in the game.

"Sometimes people forget that the largest DISH shareholder by a wide margin is Chairman Charlie Ergen," says Jeffrey Wlodarczak, an analyst with Pivotal Research Group. "The key point on this spectrum is that it is unlikely he is going to do something that is going to blow up shareholders and this spectrum acquired very cheaply gives him lots of optionality that could strengthen the core business materially," he adds.

"Charlie [Ergen] is a fantastic poker player and I would not bet against him," Wlodarczak adds.

In second quarter earnings, DISH Network is expected to earn an ominous 66.6 cents a share in profit, on revenue of $3.6 billion, according to analyst estimates compiled by Bloomberg.

For more on wireless bets, see why the iPhone 5 is driving telecoms paranoia and why carriers like AT&T are receiving a smartphone boost.

-- Written by Antoine Gara in New York
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