Reports that Dish Network (NASDAQ: DISH) and T-Mobile US (NYSE:TMUS) are in merger talks sparked a flurry of speculation from financial analysts about the potential ramifications for the wireless and cable industries. Some analysts think that the deal could increase pressure on Sprint (NYSE: S), which would have no clear path to scaling up, and on Verizon Wireless (NYSE: VZ), which would be deprived of a source of additional spectrum it might have gotten from Dish. At the same time, analysts think a T-Mobile/Dish combination will be a major bonanza for tower companies.
The reports of a deal, in both The Wall Street Journal and from Reuters, center on spectrum. Evercore ISI analysts Jonathan Schildkraut and Justin Ages noted that T-Mobile has roughly 84 MHz of spectrum and Dish has roughly 81 MHz, a figure that likely includes 25 MHz of spectrum Dish's designated entity partners won in the FCC's recent AWS-3 auction, though the FCC has not yet awarded those companies the spectrum licenses.
The combination of all of that spectrum would put the spectrum holdings of other carriers into sharp relief. Although Sprint would lose out on its erstwhile merger partner T-Mobile, it could benefit in the long run as it could sell some of its spectrum to Verizon, notes Wells Fargo analyst Jennifer Fritzsche.
"If this deal goes through, it appears TMUS will be the one who got away as we thought a TMUS merger was part of Sprint's longer-term plan," she wrote in a research not. "However, the combination of TMUS and DISH still does not solve the wireless scale issue for the combined company. TMUS will still have 56.8 MM subs (vs. S's 56.1MM, VZ's 108.6MM and T's 121.8 MM). For Sprint, this news may not be all bad. Many thought VZ would buy spectrum from DISH. That is off the table with a TMUS merger, leaving Sprint as a natural candidate with additional spectrum to sell. With more vertical industry convergence happening, it's hard to see Sprint not playing a role with the most spectrum of any carrier (even with TMUS/DISH)."
Macquarie Research analysts Kevin Smithen and Will Clayton wrote in a research note that while a Sprint/T-Mobile deal "would have been constructive for the industry," Sprint could also "have many better capitalized suitors or partners with more scale than Dish long-term including Comcast, Altice, Charter and perhaps Google or Amazon."
In the meantime, they wrote, "industry aversion" for dealing with Dish Network CEO Charlie Ergen "could send MVNO partners Sprint's way. We think that Sprint will have value as the last remaining wireless independent asset in the U.S. and that Son-san would be amenable to having a smaller piece of a stronger, bigger converged networks pie."
Fritzsche wrote that a Dish merger with T-Mobile would not immediately upend the world of AT&T (NYSE: T) or Verizon, since they would still be far ahead in terms of subscribers. "In fact, it could be a positive as TMUS may become less disruptive if it has found a buyer and must focus on profitability," she wrote. "T and VZ could also be logical buyers of any mid-band spectrum that needs to be divested as part of the transaction. Longer-term, this is further evidence that the media and wireless worlds are colliding, with the carriers who capitalize on this convergence best positioned."
However, others are less sanguine about what the deal would mean for Verizon. The Macquarie analysts said that Verizon, as a "pure-play on U.S. wireless appears to be boxed-in here, in our view as its decision to shrink its FiOS video business may come back to haunt it. We believe that VZ selling the remaining FiOS assets to Altice would only compound the issue."
So what should Verizon do? They think that it would be a positive move for Verizon to bid on Charter Communications (NASDAQ: CHTR) or Time Warner Cable (NYSE: TWC) to gain more scale in broadband and video as well as a Wi-Fi network for offloading, though Charter is obviously in the process right now of trying to buy Time Warner for $56.7 billion. "Long-term, access to Wi-Fi offload may be as important as access to licensed spectrum as video traffic continues to escalate," they wrote.
Those escalating spectrum demands could hurt Verizon, according to BTG analyst Walter Piecyk. Verizon has already started refarming its 1900 MHz PCS spectrum for LTE in certain markets despite doing a nationwide overlay of AWS-1 airwaves to augment capacity.
In the wake of the AWS-3 auction, in which Verizon bid $10.4 billion for spectrum but declined to pay high prices in major markets like New York City, Verizon has discussed the importance of small cells as a way to add capacity more cheaply. "Without depth of spectrum, Verizon faces higher operating costs and, more importantly, might not be able to deliver the speeds that a combined T-Mobile or Dish could offer," Piecyk wrote in a blog post. "In plain English, T-Mobile could offer a superior product at a lower price."
"It's also unclear exactly what spectrum the government could free up to replace the 79 MHz of spectrum that will go off the market if Dish were combined with T-Mobile," he added. "The mere suggestion that T-Mobile and Dish are in talks undoubtedly increase the regulatory risk of a Verizon purchase of Dish's spectrum under the current administration. Can you imagine if Verizon tried to tender for Dish after a proposed combination of Dish and T-Mobile with a cable partner? While the media likes to reference Ergen's interest in card playing, it may have been Verizon that over-played their hand."
Piecyk thinks Dish and Time Warner could also benefit from partnering with a cable company or another third party (in addition to Altice and Liberty Media, he mentioned Comcast (NASDAQ: CMCSA), Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT)). A third party could provide T-Mobile with more capital to buy spectrum in next year's incentive auction of 600 MHz broadcast TV airwaves as well as help fund network buildouts for years to come. "A third party could bring cash to the table, possibly a scale customer base and, in the case of cable companies, some backhaul infrastructure that might be helpful in driving higher margins," he wrote.
Regardless of those machinations, tower companies would benefit from a T-Mobile/Dish deal, analysts said. "If this deal happens, we would view it as a clear positive for the towers for two reasons: first, it would significantly improve visibility on the deployment of Dish's 80MHz of spectrum," New Street Research analyst Spencer Kurn wrote. "We think there is very little, if anything, factored into tower valuations for this at present. Second, it would reduce the odds of a Sprint/TMUS merger, which we view as a major overhang for the group."
- see this WSJ article (sub. req.)
- see this Reuters article
- see this BTIG blog post (reg. req.)
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