11.23.14

No limits Denver hold-em…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 8:42 am by timfarrar

That seems to be a pretty good summary of what Charlie Ergen has told SNR and NorthStar, the Designated Entities (DEs) which appear to be doing a lot of the bidding in the AWS-3 auction. We’re still seeing multiple bids on the New York and Los Angeles J block licenses (which are now priced at over $3.6B for just these two licenses), and so its possible that DISH’s DEs may now hold in excess of $10B of Provisionally Winning Bids (PWBs) between them.

Its interesting to note that because Ergen is a designated bidder for American AWS Wireless I LLC (the DISH subsidiary), he wouldn’t be allowed to communicate with either SNR or NorthStar during the auction. So they must be bidding in line with instructions he gave them previously, and he can’t change course in the middle of the auction, if bidding has gone well beyond what even he expected. Ergen could have set a limit on the $/MHzPOP that he is prepared to pay for a single license and/or an overall dollar cap on bidding, but it looks like neither of those factors have been affecting the bidding to date. That suggests to me that Ergen is more likely to have imposed an overall dollar cap, which could perhaps be as much as $8B to $10B each, before the 25% discount on the PWBs that each DEs is expected to receive.

A plausible bidding strategy for each DE, which requires no communication after the auction starts (and seems to roughly accord with what happened after DISH likely switched to the unpaired spectrum in Round 17), could then be something like:

Bid in every round until you see high activity in the unpaired spectrum (a sign that DISH has switched away from the AWS-3 blocks), then defend what you have, no matter what the price of each license. When you reach the overall dollar cap, drop the G block licenses first, then the H and I blocks, but keep the J blocks.”

So now the question is whether, with a weekend to think about it, AT&T and Verizon decide to leave Ergen holding the J-block licenses in major cities. Is there a point at which DISH becomes so financially stressed by the burden of spending perhaps $15B on spectrum, that it is in a weaker position after the auction than it was before (e.g. with insufficient resources to bid for T-Mobile or build out its spectrum)?

Does it matter if AT&T and Verizon are unable to deploy as much AWS-3 spectrum in major cities as they wanted? How much leverage can they exert at the FCC if DISH fails to build out these licenses? And should AT&T or Verizon force up the price of the unpaired spectrum to a level which puts the Ergen-led LightSquared reorganization plan in jeopardy? We’ll see in the next few days whether AT&T or Verizon are able to play Ergen at his own game.

UPDATE (11/23): Thinking further about the end-game, it looks to me like the mysterious spin-off of DISH’s spectrum, mentioned briefly by Ergen in the Q3 results call, is the likely way forward if one of the DEs is successful in acquiring a large block of spectrum. DISH could inject its existing spectrum assets into this entity and raise debt against the combined spectrum portfolio. Then (given the FCC rules against selling DE spectrum for at least 5 years), DISH would have a standalone entity it could spin-off to shareholders, and could lease or all of its spectrum holdings to the major operators, just like Grain Management.

UPDATE (12/1): Round 38 saw another apparent “tell” from DISH with the bidding on the New York I block: 2 new bids were submitted for a price of $1.316B, when the identical H block could have been secured for only $1.235B. Its implausible that either Verizon or AT&T would have bid for the I block at this price unless they already held the H block and wanted to double up. But equally well, its impossible for both of them to already be holding the H block, and only the holder of the H block would want to bid a higher price than necessary for the I block. So the only logical scenario under which 2 bids could have been submitted for the I block is if DISH holds the H block and both its DEs were bidding to add the I block, potentially sending a “signal” to AT&T and Verizon that DISH is determined to capture both blocks (and preserving eligibility for both DEs for when the FCC moves to the second stage of the auction). Note also that a similar single bid in Round 40 for the New York H block (after several rounds with no bids) was followed by a double bid in Round 41 (albeit at a lower price than the I block).

If we go back a few rounds then we can see many instances of these paired bids in New York, Los Angeles and a few other major cities. Until now I had assumed this simply to be a sign that DISH was competing with both AT&T and Verizon. However, now I think that quite possibly only one of AT&T and Verizon is competing very actively for the paired spectrum blocks. Most likely that would be Verizon (who can put AWS-3 to use more quickly as supplementary downlink for its AWS-1 holdings), with AT&T perhaps switching to the unpaired uplink B1 block, where DISH appears to be facing unexpectedly intense competition.

Notably, we can also see that there were two bids for the New York J block in Round 36 (after 1 bid in Round 35 and 2 bids in Round 34), followed by a single bid in Round 37 and no other bids thereafter. That sequence may indicate that Verizon finally forced DISH to relinquish the J block in Round 37. However, the fact that DISH’s DEs both appear to have enough eligibility to still be bidding for such a large license (when only one could be the winning bidder in any round) at that stage also suggests that DISH must hold a very significant share of the major city licenses. So the question now is just how far Verizon will need (and is prepared) to go in order to capture the remaining licenses it wants to secure.

11 Comments »

  1. telcominvestor said,

    November 23, 2014 at 2:43 pm

    I’m skeptical that leasing is the route of choice here… never worked for Clearwire, yet I realize we are 2 years down the road and a different block of spectrum.

    I think Ergen wants Tmobile and the opportunity has never been more ripe than now with his stock bolstered by this auction. DT knows it needs a partner to gain scale. I think they would take DISH stock in a transaction to accomplish this versus just purely looking at cashing out.

    What is your take on America Movil and SK Telecom as bidders in this auction? Could C. Slim be aggressively bidding as well? SK Telecom is no small fry either.

    Enjoy your blog…

  2. timfarrar said,

    November 23, 2014 at 10:40 pm

    Its not leasing capacity like Clearwire, it would be leasing spectrum on a long term basis. Look at the Grain structure.

    On a TMO bid, why would DT want AWS-3 (and by extension AWS-4) spectrum that Ergen is valuing at a price they were not prepared to pay in the auction? They would presumably take cash, but Ergen won’t have enough, unless he gets backing from Slim for example. However, I doubt DT value DISH stock anywhere close to where Ergen (and most analysts who put a very high price on spectrum) value it. They know about what happens when spectrum is overvalued from their European experience.

    On the other bidders, do you mean DoCoMo (SKT are not a listed bidder)? Neither DoCoMo nor America Movil sought DE status, so they can’t be responsible for the aggressive DE bidding we saw in Round 12 (and probably later on).

  3. If Charlie Ergen's Dish Network Wins AWS-3 Auction, Spectrum Spin May Follow - Stock Spinoffs said,

    November 25, 2014 at 5:05 am

    [...] addition, TMF Associates identifies Dish as a major bidder in the current auction. They further speculate that, if successful, the company will spin off its spectrum assets and [...]

  4. tancook said,

    November 25, 2014 at 8:53 am

    I’m still confused how you are so certain that the primary driving force behind the high bids is DISH… While there are these two DEs that are tied to Ergen (a little puzzled how that was alloed as well), they are just two among 70 qualified bidders.

    Based on your blog posts, you seem to dismiss other potential bidders who would have the resources (Docomo, KKR, Carlos Slim) for an unexplained reason. There is a single data point (Round 12) that indicates one (or more) DE bidders held PWBs worth at least $1.2B at that moment. (No way to tell if they were all trumped the following round and may or may not have bid further.)

    The shift to the A1 block in Round 17 is likely a sign of DISH (as expected) parking bids in the paired spectrum before moving to the licences he really wants (to combine with AWS-4 downlink spectrum).

    However, I can’t see, or have missedin your posts, what other evidence there is that this additional bidding is coming from DISH-related entities. At this point, there are only a handful of licences with 2 new bids per round (implying 3 bidders, assuming the PWB does not bid). Given that Verizon and AT&T could be two of those for the H/I/J blocks, is there anything specific to indicate DISH is driving the handful of licences receiving an additional bid?

    Technical question: is the PWB from the previous round permitted to bid in the current round? i.e., could the apparent number of bids be inflated by the perception that new bids do not include the previous PWB?

  5. timfarrar said,

    November 25, 2014 at 10:12 am

    None of the three players you mention are DEs. So they were not responsible for any of the $1.2B in PWBs in Round 12. Who else is a DE and could have bid more than $1.2B? How do we get as many as 8 bids if DISH isn’t bidding simultaneously through three entities (which maximizes chance of holding the license after the random allocation to equal winning bids). It makes sense to buy the expensive licenses through a DE to get the 25% discount, so the logical strategy is for DISH to drop out of the paired spectrum and let the DEs win the expensive licenses.

    We don’t know anything about the bidding later on. But I’ve not seen any credible suggestions of alternate bidders in the NY J block apart from DISH, AT&T and Verizon. You would expect three bidders (holder+ 2 bidders) if you see 2 new bids in a round.

    The PWB holder can overbid itself, but this would be utterly out of character behavior for AT&T and Verizon to pre-emptively push up their own winning bid. They benefit from a longer auction, where other smaller players can’t maintain eligibility, so they want to draw things out. So I think only DISH would be overbidding itself and then 2 new bids indicates either DISH plus one of AT&T and Verizon or all three of them are active.

  6. tancook said,

    November 25, 2014 at 11:51 am

    I was a little unclear… my point on the potentially significant bidders (Docomo, et al.) was not that they are DEs, but they could be bidding now while the DEs that were holding licences in Round 12 have dropped out. Most of the big licences still had 4-5 bidders at that point. It is a bit of a leap to assume the DE bidders in that round are still the remaining bidders today. (Also, I don’t know enough of the specifics to know whether there are other DE bidders who have deep pockets hidden behind them.)

    One strategy for smaller players in a SMRA auction like this is to park bids in early rounds in the largest licences because they can preserve eligibility without any real risk of winning the licences, because the large incumbents (Verizon/AT&T) will not give up the licences. As a result, any of the bidders with sufficient eligibility to bid on the NYC J-block licence could have been the holder in Round 12, even if they had no intention to ever win the licence or even pay the price at that point. This can easily explain the high number of bids in early rounds. Also, it is possible that the $1.2B in DE bids in Round 12 was split between multiple bidders, rather than a single aggressive player.

    Saying that, there also isn’t any evidence that your theory is wrong. It is a plausible case (although, I don’t see why it makes any sense for Ergen to support two different DE bidders). He may have given them the support to go after the large J-block licences (and some others), while DISH directly targets the unpaired spectrum.

    On the other hand, I can’t see any evidence that this isn’t a fight between Verizon, AT&T and T-Mobile. If Verizon and AT&T are each chasing 30 MHz, they would exaggerate bidding between themselves and could drive T-Mobile to fight back. I understand the reasoning why it might not make sense to T-Mobile to keep engaged at this point, but that logic could apply to anyone at these prices.

  7. timfarrar said,

    November 25, 2014 at 7:23 pm

    Logically, it would make little sense for AT&T and Verizon to both go in to the auction with the attitude that they need to win 30MHz each. That would just guarantee an extremely high price and disappointment for at least one of them. It is far more likely they went in seeking 20MHz each (assuming T-Mobile would take the other 10MHz) and have been taken by surprise by an unexpected bidder seeking to secure 20MHz.

    It is also highly unlikely that T-Mobile would be bidding $2B+ on a single license, when it went in with a warchest of little more than $3B.

    So I agree there are other possibilities and we won’t know it is definitely DISH until the announcement at the end. But I also believe that significant bidding by DISH is by far the most plausible explanation of what we’ve seen. Incidentally, I expect the FCC to clarify net winning bids very quickly if major DE discounts are involved, to pre-empt erroneous reporting of the amount raised in the auction.

  8. TMF Associates MSS blog » Masa’s choice… said,

    November 26, 2014 at 7:35 am

    [...] If I’m right and DISH is determined to win a significant AWS-3 spectrum position at the end of the auction, then it seems highly likely that one or both of AT&T and Verizon will leave the auction with a significant shortfall in AWS spectrum in major cities including New York, Los Angeles and potentially several other markets. [...]

  9. pfsiow said,

    November 27, 2014 at 5:28 pm

    In my opinion, it will not be financially sensible for dish to buy 10B of AWS-3 spectrum even with a 25% discount. Their credit ratings will take a big hit, impact their ability to raise any more debt in the future and basically remove all other options to turnaround their biz. The spectrum leasing plan as proposed by the author as the possible route may not be a sure win plan. AT&T and Verizon with annual incomes of more than 10B each had already downgraded by analyst bcos of the high price for aws-3 auction (and assumption tat they will win most of the spectrum).
    Analysts will be highly sceptical if dish can support the extra 10B of debt with an declining annual income of 1B. Dish do have 10B of cash but that they also have 13B long term debt. I doubt analysts will value the spectrum to be worth as much if dish paid a high price for them.

    I think they will spend around 3-5B max, given that they just sold 2B debt.

  10. TMF Associates MSS blog » The NextWave of Charlie’s strategy… said,

    January 29, 2015 at 5:44 pm

    [...] any discounts accruing to Designated Entities, who are entitled to a 25% discount. And we know that Ergen is backing two DEs (SNR and NorthStar) in the auction. While the FCC is not going to give an exact figure for the [...]

  11. TMF Associates MSS blog » How to blow up a spectrum auction… said,

    January 31, 2015 at 4:42 pm

    [...] a 25% DE discount on its bids, the outcome is exactly what I predicted from the bidding patterns back in November. I was particularly amused to look back at Jonathan Chaplin’s comment from his December 7 [...]

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