DISH's Ergen Taking Bets on Wireless Hand

NEW YORK ( TheStreet) -- Roughly 20 years ago, DISH Network ( DISH) was facing an uphill battle in a plan to go from a maker of rural satellite dishes to a national distributor of broadcast television DBS -- the company had to let the bold bet ride on a Federal Communication Commission approval to launch a TV satellite into space and build the network.

The approvals came, the satellite flew, and the company's co-founder Charlie Ergen was able to build DISH into a satellite TV alternative to cable that earned $14 billion in revenue and turned a $1.5 billion profit in 2011.

Now, having stepped down from his role as chief executive, Ergen is trying use satellites for a different mission -- a national wireless service that could profit from and meet ever-escalating smartphone demands emanating from Apple ( AAPL) iPhones and Google ( GOOG) Android-powered devices.

After spending years scavenging bankruptcy courts for spectrum -- government regulated airwaves that smartphone data runs over -- has Ergen, a noted poker player, pushed the limits of his satellite slinging ways, or assembled winning cards in the wireless sector?

In a sense, DISH investors have drawn a strong wireless hand, but they need to decide on whether to stick it out for the flop.

Investor comfort in DISH is key as the company prepares for what could be a transformative second half of 2012, which could catapult it into competition with wireless leaders like Verizon ( VZ) and AT&T ( T), or leave it lampooned with spectrum assets that don't fit with its slowly declining but cash gushing satellite business.

DISH is sitting on unused wireless assets that may have a similar value to its core satellite business. Still, the assets are also a potential landmine. This long-term strategic shift will overlay the DISH second quarter earnings story that investors will be navigating on August 8.

Few companies have the stomach to enter the wireless business because of the likely tens of billions in capital expenditure needed to build a national network. Meanwhile, the FCC is yet to even detail whether it will allow DISH to use the spectrum assets it's acquired in the 40 megahertz S-band, and if so, with what conditions.

Amid these risks, estimates of DISH's second quarter earnings are described as 'optimistic' by Evercore Partners analysts.

It could come down to a confidence game in Ergen, who remains chairman and is calling the shots in the wireless push, and a vote from DISH shareholders even if second quarter earnings fall short of Wall Street estimates. If his ambitions remain large, DISH believers are convinced that Ergen has displayed consistent discipline in guiding the Englewood, Co.-based company.

"I have owned this stock for over five years and I think Charlie Ergen is brilliant. I trust him with my capital," says Leon Cooperman, chairman and CEO of hedge fund Omega Advisors. "He has a valuable asset in his satellite subscribers and he has built very valuable assets in wireless," adds Cooperman, whose hedge fund is among DISH Network's 25 biggest shareholders with 3,392,200 shares as of March 31, according to Bloomberg data.

If the second quarter earnings consensus is optimistic, it's not an issue that seems to concern Cooperman. He thinks the company remains 'undervalued.'

Ergen plays to the notion that investing in DISH is about confiding in the company's execution and capital planning. He also plays with a poker face.

When asked if there is a dollar limit to DISH's wireless strategy, he defers to economics. "I'm happy to spend $10 billion if we can get a 50% return on it every year. I wouldn't be happy to spend $10 billion if we get a 3% return on it every year," said Ergen on DISH's first quarter earnings call. " Rest assured that as a company we're going to go spend our money where we think we can get the greatest return," he added.

DISH's poker face also extends to regulators, who've cut down recent wireless ambitions. DISH Network is asking the Federal Communications Commission to allow it to develop its spectrum for mobile broadband use and Ergen is keen to remind the government that it has done little to solve an expected wireless data crunch.

Ergen is upfront about the implications of the wireless effort being blocked by the FCC: DISH could be forced to write off its $3 billion in spectrum S-band acquisitions and billions more in other wireless assets.

"We are not the first company that's kind of faced this proposition, but the reason we made the investment and have taken the risk is really because of what the President of United States has said, and what the FCC has said... We have a spectrum crunch," noted Ergen to analysts.

Ergen places DISH's odds at 80% for gaining spectrum approval, and starting construction of a mobile broadband network or partnering with a carrier.

The flip side of Ergen's confidence can be seen in recent FCC rejections of wireless ambitions.

In May, LightSquared -- a near $3 billion investment by hedge fund Harbinger Capital Management -- roamed right into bankruptcy after the FCC ruled against its strategy to build a 4G mobile broadband network using unused radio waves, citing interference with global positioning devices. The regulator also opposed a $39 billion merger between AT&T and T-Mobile to bolster spectrum and wireless service, citing antitrust issues. AT&T pulled the merger last December and took a $4 billion writedown.

Without an FCC approval in hand -- the regulator is expected to decide whether the spectrum can be used by the fall -- DISH won't say what it could spend on the network or if it has ulterior plans, citing the need to plan around regulatory guidance. Options include a multi-billion dollar spending plan to build a network that would drain DISH's free cash flow and require heavy financing, a sale of spectrum to needy national wireless carriers like AT&T, Sprint ( S) or T-Mobile USA, or a mix of the two in a partnership with a carrier.

"It's more than likely that we would look to build a network in the most efficient way possible and that may mean doing something with a partner who already has something in place," said Tom Cullen, the executive charged with leading DISH's wireless push, in a July 13 interview.

"We don't see ourselves as speculators in spectrum," added Cullen, but he communicates a wide-open wireless strategy that is subject to the FCC's conditionality. "It is really premature for us to say what the next step is," he noted.

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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