I woke up this morning to read New Street Research’s latest 3Q2015 Wireless Trends Review, subtitled “Competition Gets Ugly: The Big Guys Have A Problem” and while I agree that competitive pressures in the US wireless market are getting ugly, I’m afraid it is the analysts rather the “Big Guys” that have a problem. In particular, New Street’s “network capacity framework” that suggests Verizon “have half the capacity they will need by 2020 to maintain current network quality” is based on a completely flawed premise, just like most other pronouncements of an imminent spectrum crisis.
This network capacity framework calculates the number of “MHz-sites” that Verizon has for LTE in the top 25 markets and assumes that data demand will grow at 30% from 2015 to 2020 (reaching 10GB/LTE sub per month by then). Ignoring the fact that New St doesn’t know its Petabytes (1 million Gbytes) from its Exabytes (1 billion Gbytes), Verizon’s “aggregate LTE data demand” is projected to increase five fold between 2015 and 2020, while Verizon is expected to increase its deployed LTE spectrum from 68 to 138MHz and its number of LTE macrosites in these markets from 21K to 27.2K over the period, which supposedly will result in 2.5 times growth in network capacity. Thus New St concludes that Verizon will have only half the capacity needed to meet demand, without buying more spectrum from DISH.
This thesis is even more flawed than the Brattle Group study for CTIA back in June, because it completely fails to consider the potential for improvements in network efficiency over the period as LTE-Advanced technologies are deployed. Even Brattle Group acknowledges that “LTE+” will carry over 70% more bps per Hz than 4G LTE, based on a move from 2×2 MIMO to 4×4 MIMO, and the original source for these estimates (Rysavy Research’s August 2014 paper on “Beyond LTE: Enabling the Mobile Broadband Explosion“) acknowledges that many additional improvements are feasible.
Correcting for this error alone, and assuming capacity constrained locations are upgraded to LTE-Advanced by 2020, New Street’s supposed capacity shortfall is reduced from 50% to 14%, and so the number of additional macro sites that Verizon would need to build is reduced from 26.7K to only 4.5K (which based on the FCC’s October 2010 estimate of $550K per cellsite would cost only $2.5B in incremental capex). That hardly seems to justify Verizon spending tens of billions of dollars to buy DISH’s spectrum.
New Street also ignore other sources of incremental capacity (such as LTE-U) and reject small cells as infeasible because they have supposedly only 1/3 the capacity of macro sites (Rysavy in fact points out in Figure 68 of his report that through careful placement to meet hotspot demand, four picocells per macrocell could produce roughly a 10x increase in capacity).
Its hardly surprising that New Street conclude Verizon’s behavior is “perplexing” and suggest that rather than “discounting to hang onto subs” Verizon “should be taking up price to shed subs faster in congested markets to preserve superior network performance for their most valuable subs.” But perhaps Verizon do actually understand network engineering and the potential for network capacity enhancements better than analysts with a simplistic, erroneous spreadsheet model?
In these circumstances Verizon would also feel happy to say no to Ergen’s blackmail and refuse to pay more than their previous offer for DISH’s spectrum (which I guess is around $1/MHzPOP). In fact, it would seem likely that Verizon don’t want a deal at any price ahead of the incentive auction, if that would enable Ergen to bid up the price of spectrum once again. On the other hand, Ergen is undoubtedly keen to find a partner to endorse the value of his spectrum holdings and force Verizon back to the table. As part of that effort, I’m told he has been visiting Google again recently, just as he did back in 2012 when he was trying to pressure AT&T to do a spectrum deal.
One possibility for such a partnership would be to reinvigorate DISH’s rooftop small cell deployment plan, and meet Ergen’s AWS-4 buildout requirements, using the AWS-4 uplinks (2000-2020MHz) as downlinks in conjunction with his 1695-1710MHz uplink spectrum. Remember that Google has backed similar efforts in the past, when it funded Clearwire (rather than LightSquared) in 2008, in order to get a competitive 4G network built out quickly, and push Verizon and AT&T to do the same. However, Ergen has little more than a month left to get a deal done before the auction restrictions kick in, so time is not on his side.
DISH’s submission to the FCC earlier this week, offering concessions on 700MHz E block power limits (thereby securing support from AT&T), and the prospects of a bid of up to $0.50/MHzPOP ($1.5B) for the PCS H block, in exchange for the option to use the 2000-2020MHz AWS-4 uplink band for downlink operation, confirms that DISH’s plan is to use LightSquared’s L-band spectrum for uplink operations. That would presumably be paired with the 2180-2200MHZ AWS-4 downlink, which would give DISH the opportunity to offer the 2000-2020MHz band as supplementary downlink for PCS operators. It also confirms that DISH’s two targets for a potential partnership are now AT&T and Sprint, since they will be the two main LTE operators in the PCS band, and strongly suggests that DISH no longer has any interest in buying T-Mobile (though a deal with DirecTV remains plausible in 2014).
Its important to remember that now it hasn’t got access to the Clearwire spectrum, DISH is essentially offering a partnership under which it would host AT&T or Sprint’s mobile spectrum (most likely in the WCS and BRS/EBS bands respectively) on its planned fixed broadband wireless network (which would use the AWS-4 downlink and L-band uplink for backhaul). In other words, DISH becomes a tower company, offering small cell hosting for as little as $100-$200 per cell per month, because DISH’s wireless broadband subscribers will be providing the site (on their rooftop satellite TV antenna) and the power for free.
If DISH secures auxiliary PCS downlink spectrum then it will also have an even more attractive set of additional spectrum to lease to AT&T or Sprint for their macrocell rollouts. That’s in addition to the 700MHz E block spectrum which AT&T desperately wants (and will feel even more pressure to secure, now it will be able to move forward with the rollout of the Qualcomm D/E block spectrum). Stating that DISH will bid for the H block also puts additional pressure on Sprint to come to a deal, which would substantially reduce the cost of SoftBank’s planned small cell rollout in the 2.5GHz BRS/EBS band in suburban and rural areas.
UPDATE (9/13): With the FCC confirming plans for a Jan 2014 H-block auction this afternoon, with DISH’s proposed reserve price of $0.50/MHzPOP, it seems near certain that DISH’s deal is on a fairly smooth path to being approved by mid December (30 days before the auction starts), so DISH should have clarity in time for the LightSquared auction. It is possible that this could lead to other subordinated debt/preferred holders attempting to push up the price DISH will have to pay, but it is also important to note that DISH will have other potential choices (such as the 1695-1710MHz block) for uplink spectrum and will have the option but not the obligation to switch the AWS-4 uplink band to downlinks. Thus the timetable this time around is likely to be highly favorable for DISH: it will know about the FCC before the LightSquared auction wraps up, which comes before the H block auction, which comes before the 1695-1710MHz auction.
However, one key consideration for DISH is whether it will be forced to pay lease fees to Inmarsat for the LightSquared spectrum, starting next April, which would be around $90M-$100M p.a. if LightSquared’s application for 20MHz of terrestrial uplink authorization is ultimately approved. (Note that DISH is certain to drop LightSquared’s request for a purported “swap” of downlink spectrum in the 1675-80MHz band, as it only wants the L-band uplink in the near term, and this is an obvious concession to offer to the FCC).
I believe that DISH is unwilling to pay Inmarsat anything material in cash while it is waiting for a terrestrial deal, and therefore needs to gain leverage over Inmarsat in the run up to the April 2014 deadline for payments to resume. To do that I understand that EchoStar’s Hughes subsidiary is working on a dual mode L/S-band satellite phone, and Ergen is considering a roaming agreement/partnership with Thuraya, enabling Thuraya to gain access to the North American market via the TerreStar and/or LightSquared satellites. Alternatively, in order to entice Inmarsat into a deal, DISH is prepared to enter into a European S-band joint venture, using the TerreStar-2 satellite to secure Inmarsat’s S-band license (of course if Inmarsat refuses then DISH could instead partner with Solaris Mobile, the Eutelsat/SES joint venture).
So it now looks like we are set for a tense few months of dealmaking in the MSS industry, and investors will have to wait and see whether Inmarsat is prepared to compromise over the LightSquared Cooperation Agreement. Of course, if Inmarsat refuses, and the Cooperation Agreement lapses, then Inmarsat could prevent any terrestrial use of the L-band spectrum by DISH. However, that might not go down too well with the FCC, if it is relying on DISH to bring the additional spectrum into use soon (and provide rural broadband competition to boot), so it is far from clear who has the most leverage here.
In addition, I’m told that Inmarsat signed the contract with Boeing on Tuesday for the fourth GX (backup) satellite, so it now will incur an extra $150M+ of capex in the next few years (assuming that this satellite remains a ground spare, which is not a foregone conclusion in the medium term).
That could be an awkward message for Inmarsat’s investors, who have bid up the company’s shares substantially in recent months, if Inmarsat not only has to spend more money on satellites, but is also facing the prospect of no more cash from the L-band spectrum, the possibility of investment to exploit the European S-band license (if it does partner with DISH) and perhaps even additional competition for its core MSS services (if Inmarsat rejects DISH’s offer).
Last week, John Dooley of Jarvinian, who have been conducting tests of Globalstar’s proposed TLPS service (which is intended to provide a dedicated, managed WiFi channel) made a filing with the FCC in which he stated that the recent TLPS testing in the Bay Area was undertaken “to help a major technology company assess the significant performance benefits of TLPS for a transformative consumer broadband application”. His filing did not state the name of this company, but the testing under Globalstar’s experimental license (issued by the FCC on April 1) was undertaken at 3 locations in Cupertino and Sunnyvale.
Of course, Amazon’s potential interest in Globalstar’s spectrum appears to be a key reason why Thermo agreed to invest another $85M into Globalstar in May, in order to complete the 5.75% notes exchange and restructure Globalstar’s $586M loan guaranteed by COFACE. Many investors are now also eagerly expecting the FCC to issue an NPRM setting out proposed rules for TLPS, although it is somewhat unclear whether Chairman Clyburn will act on her own, or if any decision will have to wait for incoming Chairman Wheeler (who has worked extensively on interference issues as chairman of the FCC’s TAC, which issued a report in February suggesting TLPS would be a good candidate for the FCC’s new approach to adjacent band interference).
The fact that the Globalstar experimental license will last for two years suggests that it may take some time for all interference issues to be resolved (including the dispute with BAS interests which is becoming increasinglyheated) and/or for Amazon to make a final decision on whether to use TLPS or other spectrum for its planned new application. If Amazon does choose Globalstar then this could lead to a substantial windfall: Globalstar has asserted that its spectrum is even more valuable than that of Clearwire, because of the unique compatibility of TLPS with existing WiFi equipment, implying that it puts a value of at least $2B on the 22MHz of TLPS spectrum.
With the FCC’s intention to license additional spectrum for unlicensed or shared use in the 3600MHz and 5GHz bands, along with promotion of white space access technology, Amazon may have a choice of other cheaper spectrum (albeit without the same ecosystem) in the near future or even using capacity on an existing wireless network. However, until we find out more about the nature of Amazon’s plans it will be hard to know which spectrum is most suitable, and how much Amazon would want to pay to gain access to it.
Now that Clearwire’s board has urged its shareholders to reject the Sprint bid, and Sprint has initiated litigation to try and block DISH’s tender offer, it seems Charlie Ergen has a good chance of achieving his objective: to ensure Sprint is unable to make use of Clearwire’s spectrum and enhance its network capacity as SoftBank desires. DISH has indicated that it will now focus on its Clearwire tender instead of making a further bid for Sprint in advance of today’s deadline.
While that doesn’t rule out DISH making another higher but unfinanced offer to disrupt the Sprint-SoftBank vote next week, it seems Ergen might be better off having SoftBank complete a takeover of Sprint and then discover that its $21.6B investment will go to waste unless Sprint agrees to sell DISH the 40MHz of Clearwire’s spectrum that Ergen wants.
So I’m left wondering if DISH’s actions have all been part of a grand plan:
a) keep making offers that persuaded Clearwire shareholders (and ultimately the Clearwire board) to reject the Sprint takeover
b) make an uncommitted bid for Sprint to persuade SoftBank to overpay for Sprint
c) make noises about LightSquared’s spectrum to persuade Sprint to raise its bid for Clearwire by less than expected
d) come in with a much better offer for Clearwire shares at the last minute, which was high enough to ensure that the Sprint bid for Clearwire will be rejected
e) hedge the bid with just enough conditions that will ensure that Sprint is unable to make use of Clearwire’s spectrum and that Clearwire, DISH and Sprint are tied up in litigation for months to come.
Given that sequence of events, its reasonable to ask if SoftBank really wants to own Sprint without the Clearwire spectrum? If not, then will SoftBank have any option other than to ultimately do a deal with Ergen on his terms? If you think that’s unlikely, then you only need look back to the Cablevision-DISH trial over Voom last fall, where DISH had a terrible position in the courtroom, but still managed to get to a settlement which achieved Ergen’s objectives (including a purchase of the MVDDS spectrum which will be part of DISH’s planned wireless broadband network).
After all, remember that DISH still has a number of options to make SoftBank’s life even more miserable, including mounting a rival bid for the PCS H-block spectrum which Sprint desperately needs to enhance the capacity of its existing LTE network.
So maybe the question is now when not if SoftBank will be forced to settle with DISH? As Vijay Jayant told The Hollywood Reporter in April “Charlie’s attitude is, ‘At some point, they’ll negotiate with me on my terms.’ He’s bluffing until he’s not.”
Please Masa, don’t throw me into the litigation briar patch!
This week saw an apparent reversal for DISH on Monday, when SoftBank agreed to increase its bid for Sprint slightly and Sprint rejected DISH’s bid as unlikely to lead to a “superior offer”, followed by a victory on Wednesday when Clearwire’s special committee recommended that shareholders accept DISH’s $4.40 per share tender over Sprint’s $3.40 per share bid to buy out minorities.
Despite this apparently split decision, many seem to believe that the outcome will have to be all-or-nothing, with either DISH or Softbank winning both Sprint and Clearwire. In other words, either Sprint increases its bid for Clearwire to fend off DISH, or DISH brings in an equity partner to further improve its bid for Sprint. However, Sprint has put some serious roadblocks in DISH’s way, increasing the break-up fee due to SoftBank if its bid is rejected and more importantly, requiring any counterbid by DISH to be “fully financed pursuant to binding commitments from recognized financial institutions“. Sprint has also stated that it will “enforce its governance rights in Clearwire” and previously described DISH’s offer for Clearwire as “illegal”.
In my view, rather than pointing towards a new DISH bid for Sprint with committed financing (costing hundreds of millions of dollars) which would potentially still be rejected by the Sprint board, that suggests to me that DISH might instead make a much higher (non-financed) bid for Sprint and then initiate legal action over Sprint’s refusal to consider it. Similarly, DISH has been trying to delay FCC approval for the SoftBank bid, because Softbank has been emphasizing the urgency of moving forward quickly to improve Sprint’s network and the deal becomes less attractive to SoftBank the longer it is delayed. Going forward DISH would presumably also bid against Sprint for the H-block spectrum, closing off yet another avenue for Sprint to improve its network.
A similar strategy may be at work in the Clearwire bidding, and even if Sprint was to mount an increased bid (which seems less likely now that SoftBank has increased the offer to Sprint shareholders and reduced the cash available to Sprint for investment), I’m convinced that Ergen would simply increase DISH’s tender offer once again. As a result, DISH is very likely to gain a substantial stake in Clearwire, and then Ergen will be able to block Sprint from taking full advantage of Clearwire’s spectrum, and probably tie the company up in another legal battle over Sprint’s “governance rights”.
Remember that as Craig Moffett noted “Dish is unique in that it uses litigation as a profit center” and Charlie Ergen said last year “I may be the only CEO who likes to go to depositions…You can live in a bubble, and you’re probably not going to get a disease. But you can play in the mud and the dirt, and you’re probably not going to get a disease either, because you get immune to it. You pick your poison, and I think we choose to go play in the mud.”
So now the question for Masayoshi Son is, does he want to tie up Sprint and Clearwire in litigation for years, or will he instead reach an accommodation with Ergen, and sell DISH the 40MHz of Clearwire spectrum that Ergen wants, in exchange for getting full control of Sprint and the remainder of Clearwire? Such a deal might enable Ergen to become a wireless competitor (as it would likely be followed by DISH purchasing T-Mobile), but the alternative may be that SoftBank’s $21.6B investment in Sprint wastes away, as Sprint fails to improve its network and does not become any more competitive with AT&T and Verizon.
So the question is who holds the LightSquared LP Preferred Shares, which I was told were sold to Ergen/Sound Point by Fortress and Providence in April when they sold their Term Loan debt. Notably, Solus (who have been on the opposite side from Ergen in previous MSS bankruptcies) has also sold its LP Preferred holdings in recent months. So its pretty clear that there is likely a single large undeclared holder controlling virtually all of the fulcrum security in this bankruptcy. Is it DISH (perhaps holding the preferred shares directly rather than through Sound Point) or someone else? And what happened to the indications I’d received that Sound Point owns more than half of the Term Loan? Is there another undisclosed Sound Point fund (perhaps backed by Carlos Slim?) in addition to SPSO that controls an additional $300M to $400M of the term loan? Its going to be very interesting to see how this works itself out and who now owns what, as we look forward to another epic legal battle over LightSquared’s proposed reorganization plan.
Some observers may be wondering if Charlie Ergen is serious when he suggests using LightSquared spectrum as an alternative to Clearwire, as suggested by today’s news that DISH made a $2B cash bid last week to buy LightSquared (note that the offer is for LightSquared LP not Inc, i.e. ignoring the 1670-75MHz Crown Castle lease). After all, some might think this is yet another in a series of increasingly implausible maneuvers, as DISH tries desperately to find a way to exploit its spectrum assets.
However, its important to note that this story comes immediately before Clearwire shareholders were set to vote on Sprint’s bid for the company. That’s curiously similar to the leak of news that DISH was interested in buying T-Mobile (also to Bloomberg), just a few days before DISH made its bid for Sprint last month, so I wonder what Charlie Ergen has in mind this time around.
In the case of LightSquared, the company still has exclusivity to propose a plan until the end of this month, while DISH has indicated that its offer only remains valid until May 31, so DISH has plenty of outs if it wants. In addition, its hardly likely that Harbinger would accept an offer that would wipe out their equity, even if value is left for preferred holders (where Sound Point owns an 80% stake and would thus control the fulcrum security in any reorganization) after paying off the $1.7B plus interest due on the term loan.
LightSquared’s spectrum is certainly not a near term alternative to Clearwire, given that it will take years for use to be approved, and an L-band ecosystem won’t develop until well after that for DISH’s AWS-4 spectrum. On the other hand, the L-band has near term value to DISH because of the Mexican situation, and could be a long term backup option, if DISH plans to sit on its AWS-4 holdings for the next several years and wants to reband it to downlink spectrum, so its worth forcing Harbinger’s hand and ensuring that LightSquared’s assets are ultimately auctioned off.
However, just as the T-Mobile story was a red herring to distract from DISH’s planned bid for Sprint (even though it remains a possible alternative option for DISH), I wonder if the LightSquared story indicates that DISH has another plan to announce in the next few days. Could it be a deal to buy spectrum from Clearwire, if Sprint’s bid is unsuccessful? Certainly the suggestion that LightSquared is a viable option might help DISH in negotiations with Clearwire over price.
Another possibility is that DISH is trying to persuade Clearwire shareholders to sell out to Sprint for a relatively lower price, on the basis that DISH could then go all out to buy Sprint, without worrying about Crest trying to hold out for more money for Clearwire investors. Finally, and perhaps the biggest stretch: could DISH be poised to reach an understanding with SoftBank that it will gain control of some of Clearwire’s spectrum if SoftBank succeeds in buying Sprint and Clearwire without a significant increase in the current bids?
News tonight that Clearwire may decide to delay the vote on Sprint’s bid certainly suggests that Sprint might now succeed in securing the votes to buy Clearwire with only a modest increase in its bid price (to say $3.30 to $3.50 per share). In that case, DISH would have to either negotiate with or outbid SoftBank if it is to secure access to the Clearwire spectrum it wants, unless DISH succeeds in persuading the FCC that Sprint should be forced to dispose of some of Clearwire’s spectrum as a condition of closing the deal.
At least from SoftBank’s point of view, DISH would certainly be a more palatable purchaser of Clearwire’s spectrum than Verizon. If that presents too much of a problem (from the point of view of Sprint shareholders who would then be unable to realize the benefit of a rival DISH bid), could Sprint sell some 2.5GHz spectrum to T-Mobile instead, presenting DISH with another indirect route to acquire this spectrum?
Softbank has been downplaying the prospects of an increase in its bid for Clearwire, and my guess is that it will be prepared to let Sprint’s current bid be rejected in the May 21 vote, because its hard to see Clearwire’s shareholders approving a deal with Sprint with only a modest bump in the price (say to match DISH’s $3.30 offer). Then the question is whether Sprint (and SoftBank) would allow Clearwire to sell DISH the 40MHz of 2.5GHz spectrum that DISH has been seeking (with the likelihood that Ergen might then withdraw his bid for Sprint)?
Tonight an analyst report from Macquarie is speculating that DISH will instead team up with American Movil and bid for LightSquared, as an alternative to Clearwire (whose spectrum could then be sold to Verizon). While a partnership between Ergen and Slim is plausible (and indeed is something I’ve been writing about for the last year), using LightSquared’s spectrum as an alternative to Clearwire makes little sense (even if Verizon was able to buy all of Clearwire’s spectrum, which of course it can’t because the BRS spectrum is counted in the spectrum screen). Strangely, Macquarie thinks DISH could get 20MHz of uplink and 10MHz of downlink spectrum from LightSquared, but the 1675-80MHz spectrum won’t be allocated until 2017, and even if it were available, only 10MHz of downlink spectrum would be insufficient for DISH’s plans.
Our report on DISH sorts through the options for DISH, and discusses the reality of what can be done with LightSquared’s spectrum. We also consider the relative advantages of DISH and SoftBank’s plans for Clearwire’s spectrum. In particular, we consider one question that appears to have escaped all of the analysts looking at this situation: what is the value of DISH’s 14M potential cellsites?
If you’ve been wondering what I’ve been up to for the last couple of weeks (like Phil), I’m pleased to announce that I’ve been hard at work on a new report, released today, on DISH’s bid for Sprint, which discusses DISH’s plans, alternatives and the most likely outcomes from the battle with SoftBank. You can also read some of my thoughts in a GigaOm article (though its not very accurately titled – that wasn’t my choice) or listen to my interview on CNBC last week.
If you are interested in getting a copy of the report, and discussing my conclusions, then an order form and report summary can be found here or please email me for more details. If you’d like to meet in person, then do get in touch: I’ll be in New York next week from May 7-9, on a panel session discussing “Wifi – Friend or Foe of the Mobile Network?” at the Jefferies TMT conference (May 8th) and then at CTIA in Las Vegas from May 21-22, speaking at a Tower and Small Cell Summit panel on “Spectrum Acquisitions and Their Impact on Cell Towers” (May 21st).
UPDATE: A few early comments on the report:
“It was excellent; a really deep analysis. I cannot fault your conclusions and I actually learnt a lot from reading it.” Wireless company CEO
“Read your report this morning. It’s very good…I think your ideas are dead on” National tech reporter
For the last week, since DirecTV’s bid for GVT fell through, rumors have been circulating about a potential merger between DirecTV and DISH. However, to me that seems rather implausible in the near term: while a merger might well be feasible from a regulatory perspective, there would almost certainly be months of jockeying for position in Brazil and elsewhere, before it became clear which of the two companies would be in the stronger position to dictate the terms of a merger.
Instead, if DISH isn’t to be left holding its spectrum assets for many years (with no potential buyer on the horizon, after AT&T and Verizon both declared they would not be buying any more spectrum outside of FCC auctions in the next few years), DISH now has to focus on trying to bring its spectrum plans to fruition in the immediate future. This means seeking either to block the Sprint-Clearwire deal (to gain leverage for a network sharing agreement with Sprint) or to do the same in the T-Mobile-MetroPCS deal, which is now set to close in the next few weeks, unless MetroPCS shareholders vote it down.
I suggested last month that if Clearwire drew down the funding line from Sprint at the end of February, then DISH might “potentially move on MetroPCS immediately thereafter”. While no public offer has emerged, in recent days DISH has sounded noticeably less enthusiastic about its prospects of blocking the Sprint-Clearwire merger (and note that DISH is likely to make a $250M-$300M profit on its investment in Clearwire simply by allowing Sprint’s deal to go through). It therefore seems to me that if DISH does emerge with a deal in the near future (which perhaps might have prompted the 5% rise in DISH’s stock price on Wednesday), then the only plausible possibility is that T-Mobile got worried that its MetroPCS merger would be voted down, and negotiated a network sharing deal behind the scenes with Charlie Ergen.
That would be a great move for T-Mobile, at one stroke removing both potential alternative merger partners for MetroPCS (by taking DISH off the table and ensuring that Sprint is tied up with its Clearwire merger) and also cementing its position as the wireless operator best able to offer large, low cost data packages for the foreseeable future. Of course it would also be disastrous for those hedge funds betting that they can force T-Mobile and Sprint to increase the financial consideration being offered for MetroPCS and Clearwire respectively.
What would such a deal look like? I would guess very much like DISH’s desired deal with Sprint, namely that T-Mobile hosts the DISH spectrum on its LTE network, while taking most if not all of the financial consideration in the form of capacity, providing DISH with a roaming deal plus up to half of the AWS-4 capacity to launch its own wireless services. A deal like that, with no spectrum actually changing hands, would provide no basis for further FCC review of the T-Mobile/MetroPCS transaction, so the perfect time to announce it would be in the next couple of days (now all approvals have been received), giving MetroPCS investors time to contemplate their fate ahead of the April 12 vote.
The question on everyone’s mind after DISH’s results call on Wednesday is of course “when will Charlie Ergen find a partner” to fulfill his wireless ambitions. Ergen was pretty clear that if DISH’s offer to buy spectrum from Clearwire succeeds then Sprint would be backed so far into a corner that it would be forced to partner with DISH (on Ergen’s terms). Conversely, if Sprint won its takeover bid for Clearwire then there is no way that DISH would accept Sprint’s terms for a partnership. The difference between DISH and Sprint’s positions appears to be that Sprint wants a LightSquared-like deal: a large cash payment for the network buildout, and Sprint having the option (but not the obligation) to buy capacity, whereas DISH wants Sprint to take its payment for a network sharing agreement solely in capacity, not in cash.
As an aside, its interesting to note that the relationship between Ergen and Hesse is obviously pretty poor: Sprint’s proxy for the Softbank deal notes that it was Keith Cowan who dealt with Ergen (Company Z) last summer, not Hesse. As a result, if Sprint did lose Clearwire’s spectrum to DISH, I wouldn’t be at all suprised to see the blame placed on Hesse, resulting in him leaving Sprint, and Masayoshi Son and Charlie Ergen could then work out a partnership between themselves.
If DISH’s bid for Clearwire fails, then DISH will at least have made an impressive profit on the deal: according to DISH’s 10-K, its holdings of Clearwire debt are now worth $951M, compared to an adjusted cost as of September 2012 of $745M. That is a profit of over $200M excluding the interest payment made in December 2012, which would have been at least another $50M (assuming the June interest payment is already included in the adjusted cost basis).
However, and more importantly, what is Ergen’s backup plan, if he simply takes his profits in Clearwire? If DISH wants to achieve a partnership this year, then the only realistic offer is to mount a counterbid for MetroPCS. Recall that DISH offered $11 per share for MetroPCS last summer (in parallel with DISH’s bid to buy spectrum from Clearwire) which was rejected as undervaluing the company. Given MetroPCS is now trading at only $10 per share, what does DISH have to lose by making a similar offer? At the very least that would force T-Mobile to the bargaining table, and DISH might be persuaded to withdraw its offer if T-Mobile offered an attractive network sharing deal. Indeed, if Clearwire’s special committee makes a decision next week to draw on the Sprint funding, I would expect DISH to potentially move on MetroPCS immediately thereafter.
If DISH doesn’t succeed with that gambit, then the timeline for a deal moves back at least until the end of this year or sometime next. LightSquared’s exclusivity in its bankruptcy case has been extended to July 15, but alternative offers can be made after that time, with a view to a resolution of the case before the end of this year. As I’ve noted before, if DISH takes a slightly longer time horizon, then a bid for LightSquared, and conversion of the 2GHz spectrum to downlink use would be an obvious value-enhancing maneuver. In addition, it would put DISH in a much better position to challenge Sprint in the auction for the H-block spectrum, which Sprint has admitted it needs to buy.
Finally, DISH’s ultimate fallback option may be to try and sell the spectrum to another company. However, AT&T appears well set for the next several years, having apparently decided not to pursue DISH when Ergen’s waiver request was denied by the FCC last spring. Verizon has also ruled itself out as a buyer and T-Mobile will be tied up integrating MetroPCS for some time (and after that acquisition will own more spectrum per subscriber than either AT&T or Verizon).
As a result, the timeline for that sale (at least if Ergen is to get an attractive price) may be pretty long, probably beyond the resolution of the broadcast incentive auction (scheduled for 2014) and perhaps even extending until after the 2016 Presidential election, if AT&T and Verizon are to be regarded as serious bidders, given the desire of the FCC to let Sprint and T-Mobile catch-up with their bigger rivals. That is even more likely to be the case if the recent slowdown in the growth of wireless data traffic prompts a reassessment of operators’ future spectrum needs and finally buries the supposed “spectrum crunch”.