01.27.14

What if they held an auction and nobody came?

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 3:10 pm by timfarrar

No, not LightSquared, although a renewed auction, with no contingencies associated with FCC approval, does now seem like the most plausible way forward for the company. The big issue is then whether Ergen/SPSO’s debt holding are subordinated as a result of the recent trial: if he is then it might not require much more than a $1.2B credit bid for the debtholders to take control of the company, although in those circumstances I’d still expect Ergen to come back with a rival (personal) bid for the assets so that he doesn’t lose his $700M investment. However, if there is no subordination, then we may not see anyone outbidding Ergen even at a price of $1.5B-$2B (which would not repay the secured debtholders in full).

Actually I’m more interested in the lack of competitive bidding in the H-block auction, which slowed even further today. So far, after Round 12, only $456M has been bid for the licenses on offer, or less than 30% of DISH’s minimum bid commitment of $1564M. The bidding is anonymous, so its hard to tell whether two different bidders are bidding in turn for many of the licenses or if DISH is bidding against itself in order to reach the minimum commitment.

However, the evidence now points increasingly to it being the latter situation, after bidding on the New York and Los Angeles licenses (which had accounted for $216.5M or 56% of the total bids) stopped at the end of Round 8. Then bidding resumed on several other large cities, including Boston, Washington, Chicago, Dallas, San Francisco, which had seen no bids since Round 1. The coordinated nature of this switching could mean that DISH faces a single large opponent, who ceased bidding on New York and Los Angeles and used its eligibility to bid for these other cities instead.

Instead, it seems more likely that DISH has been bidding against itself since the early rounds of the auction, because DISH has committed to bid $0.50/MHzPOP on average across the country and the bids have only reached $0.51 in New York and $0.41 in Los Angeles. Obviously any opponent would have had to have been prepared to bid rather more than $0.50/MHzPOP to win the licenses in NY or LA, and even if the objective of a DISH opponent was actually to pick up less expensive licenses in other cities, it would have been necessary to force DISH to bid more than $0.50/MHzPOP in NY and LA so that DISH could reach its committed minimum bid threshold without owning all of the licenses nationwide.

If we look at all of the 24 licenses that have attracted competing bids at any stage during the auction, as shown in the chart below, we can see that virtually all of the competitive bidding has been confined to a few small areas, notably in Colorado, Nebraska, Wyoming, Idaho and Utah, where 10 licenses (including Denver and Salt Lake City) have seen multiple bids. There has also been another smaller cluster of activity in Virginia, North Carolina and West Virginia.

It is particularly notable that DISH appears to have been deterring any rival bids through multiple rounds of incremental bidding, regardless of whether it holds the license (which is randomly assigned between equal competing bids), until any competitors have demonstrably given up, as seen in the repeated rounds of multiple bids (note competitors with no minimum bid requirement would not overbid themselves, but DISH would be happy to do that while it remains below the minimum bidding threshold).

My suspicion is that the same factor may have been in play in New York and Los Angeles, where a token competitive bid was mounted in the first round, and then DISH’s one or more major rival(s) dropped out of the auction, leaving only a handful of small regional players to fight a doomed battle with DISH over a few insignificant licenses like North Platte and Scottsbluff, NE. If that were not the case, then we would again have seen DISH make overbids when it held the NY or LA license itself and that would have manifested itself in two competing bids being made for these licenses if a competitor were present. The fact that no competing bids were offered in NY and LA after Round 1 strongly suggests that no competitors were bidding against DISH for these licenses after that point.

Even more significant than the slowing increase in overall bids (where the determining factor is clearly DISH bidding against itself), the increase in total bids for once contested licenses today has been only $1M-$2M per round, demonstrating that virtually no-one is still fighting against DISH. DISH therefore appears well set to capture all of the H-block licenses in the country that it wants, as it has enough spare eligibility to bid for all of these licenses (including those still held by the FCC) for many rounds to come. The fact that the FCC has now increased the pace of the auction to 5 rounds per day, starting Tuesday, also supports the view that DISH is the only bidder for most licenses and most other participants have dropped out.

Taking a wider view, many commentators will undoubtedly try and explain away the results of the H-block auction as an aberration, due to the lack of major competitors for DISH. However, even if you accept that view (and ignore the fact that an unprecedented amount of spectrum is being made available through auctions this year and next, which is likely to change the balance of demand and supply significantly), it still doesn’t give much comfort to those who believe that spectrum is a scarce, appreciating asset. After all, this auction has demonstrated that if, like LightSquared, you don’t have many buyers for your spectrum, you’re not going to be able to realize a high price for that asset.

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