Charlie Ergen’s atypical absence from the Paris satellite conference this week was not the only pointer that something is happening at DISH which could lead to a spectrum spinoff being announced imminently. On Wednesday Northstar and SNR asked for and were granted a two week extension to the September 17 deadline to provide an irrevocable standby letter of credit for the $3.3B DE discount that the Commission has ordered to be repaid.
This move signals that DISH is close to a deal to restructure its spectrum holdings and presumably announce the spinoff of a spectrum leasing company before October 1. However, the question is who would be the anchor leasing tenant for that entity, which would enable it to raise tens of billions of dollars of debt in its own right, and allow the Spinco to pass the proceeds back to DISH and/or to fund a bid for additional spectrum in the upcoming incentive auction.
Back in August I speculated that Sprint was a potential wild card partner for DISH, but Verizon has always been the more attractive option, given its greater financial resources and that it bid against DISH in the AWS-3 auction earlier this year and will soon be deploying AWS-3 to supplement its existing AWS-1 network. Its therefore hardly a coincidence that Verizon was openly discussing on Thursday its interest in a deal with DISH, including that “we’ve had discussions about how we could provide [Dish Network Chairman and CEO Charlie Ergen] with megabytes and how he could pay for it with spectrum.”
It seems clear that Verizon would be interested in gaining access to both DISH’s AWS-3 winnings and the adjacent AWS-4 downlink through a leasing deal. However, by advertising its bottom line in public, and in particular that Verizon is not willing to pay DISH’s asking price in cash to lease this spectrum, it seems that Verizon has presented Ergen with a take it or leave it proposition, calculating that DISH has no other options.
If DISH really is serious about entering the wireless business, then it could use the “megabytes” offered by Verizon (which would presumably not be limited to being provided on the spectrum under lease) to set up an MVNO business, and the price established by Verizon could then serve as a benchmark for cash deals with other parties (i.e. a 700MHz E block deal with AT&T and an H-block/AWS-3 uplink deal with Sprint). Theoretically Verizon could offer quite a high price, especially if it calculated that DISH might not succeed in the MVNO business and would therefore leave most of the megabytes unused.
However, this outcome would leave DISH without the ability to raise substantial debt at the Spinco, unless and until further cash deals were struck. That’s likely a wise move for Verizon, since it would prevent DISH from bidding aggressively in the incentive auction, and potentially result in lower prices in that auction and a correspondingly lower benchmark for future spectrum transactions.
So now we’ll see if Ergen accepts Verizon’s offer or if he can come up with an alternative leasing partner in the next week and a half. Alternatively, and perhaps even more likely, is that no deal will be struck now. Then Ergen might have to wait for a long time for the next opening, as operators focus their attention on the incentive auction next spring and beyond that on the possibility that a change of administration in November 2016 could result in a different regulatory climate for deals that are impossible today (such as a Sprint/T-Mobile merger).