How Dish Network and T-Mobile US Could Get on the Same Wavelength

NEW YORK (The Deal) -- A merger of Dish Network (DISH) and T-Mobile US (TMUS) would bring together two of the true mavericks in the U.S. communications business.

The companies have apparently discussed how Dish Network's Co-Founder and Chairman Charlie Ergen and T-Mobile USA Chief Executive and President John J. Legere would share power, according to The Wall Street Journal.

Satellite TV group Dish Network gained $3.69, or 5.2%, to $74.50 in Thursday trading, as talk of a merger between the satellite TV group and wireless carrier resurfaced. T-Mobile rose $2.22, or nearly 5.8%, to $40.55.

The deal makes great sense.

Among other factors, Ergen has acquired a trove of wireless spectrum and Legere's telecom is in need of more capacity. However, the value of Dish Network's spectrum portfolio could also pose a hitch.


DISH NETWORK CEO CHARLIE ERGEN

Dish Network executives told analysts at a Tuesday meeting that they think that the company's spectrum trove is worth $60 billion, Jonathan Schildkraut of Evercore ISI wrote in a Thursday report.

That figure is almost double T-Mobile's $32.3 billion market capitalization.

Even when factoring in the telecom's debt load, T-Mobile's enterprise value comes to $50 billion.

The relative imbalance could be a "sticking point" in talks about a price, Schildkraut wrote.

Dish Network and T-Mobile each have a bit more than 80 megahertz of wireless spectrum.

"Considering the similarities of the spectrum positions, we believe it is hard to argue a meaningful difference in valuation, and, of course, value needs to also be attributed to [T-Mobile]'s operating business," Schildkraut wrote.

The valuation gap may be even greater than Dish Network anticipates.

Marci Ryvicker of Wells Fargo Securities estimated in a recent note that Dish Network's licenses are worth close to $78 billion.

The 700 MHz licenses that Dish Network purchased in a 2008 auction are worth about $830 million, she wrote.

The AWS-4 licenses that the company acquired in 2012 through the bankruptcies of satellite communications companies DBSD North America and TerreStar Networks could be worth $55 billion, Ryvicker wrote.

The Federal Communications Commission granted a waiver that made the licenses more valuable. About half the licenses were earmarked for uplink transmissions, from a cell phone to a wireless tower.

The government allowed Dish Network to repurpose the uplink spectrum for downlink transmissions, which carry video and other data from towers to cell phones.

The H-Block and AWS-3 licenses that Dish Network acquired in auctions the past two years are worth $7.8 billion and $13 billion, respectively, Ryvicker wrote.

All this means that T-Mobile could be worth far more than its market cap would suggest, especially because it is running a real wireless business, something for which Dish Network is desperate. On the other hand, Dish Network's estimates of its spectrum's value also dwarfs its own $32.6 billion market cap.

So everyone might have to set their sights a little lower.

Representatives of Dish Network and T-Mobile USA declined to comment.

Spectrum valuations have increased in the last year, partly because of Ergen.

Dish bid aggressively in the AWS-3 auction, which generated nearly $45 billion in bids and greatly exceeded projections. The satellite TV group partnered with smaller players and obtained bidding credits that gave Ergen a discount as he pushed up prices for licenses.

UBS analyst John Hodulick wrote Thursday that Dish Network could pay $40 a share, half stock and half cash, for T-Mobile.

Acquiring T-Mobile would give Ergen a wireless broadband network that his satellite TV system lacks. It would also allow him to actually use the spectrum he has spent the past seven years acquiring.

But Dish Network has drawn a clear line in the sand about the value of its spectrum, and the market has assigned a different valuation to T-Mobile. Coming together with meeting of the minds on price could be difficult.

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