Analysts: As AWS-3 auction climbs past $34B, Dish's bidding raises questions about its strategy

Now that the FCC's AWS-3 spectrum auction has raised more than $34 billion in provisional winning bids, a great deal of attention is turning to the role Dish Network (NASDAQ: DISH) may be playing in the bidding--and what the company might do with any spectrum it winds up with once the auction ends.

Since the auction started Nov. 13, many financial and industry analysts have speculated that Dish and its allied bidding partners have been bidding up the prices on the paired spectrum in the auction, 1755-1780 MHz for uplink operations and 2155-2180 MHz for downlink, to force Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T) to pay more for the spectrum. As the bids have kept climbing--totaling $34.08 billion after 27 rounds--the conventional wisdom has been that Dish will not actually walk away with the largest spectrum licenses in the biggest markets. However, there is increasing speculation that Dish may actually win some key licenses after all, raising further questions about Dish's long-term spectrum strategy.

In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that "we wouldn't be surprised if the company (Dish) also acquired some synergistic spectrum (J-Block and unpaired) at auction."

Given Dish's material cash position ($17 billion in cash and marketable securities), the Jefferies analysts wrote they are not concerned about Dish's liquidity, but rather have questions about the company's long-term strategy. "The larger Dish's individual spectrum position becomes, the more complicated it is to monetize the spectrum," they added. "Assuming Dish meaningfully participates at the AWS-3 auction, its spectrum position would rival T-Mobile's during the AT&T acquisition attempt, which could raise concerns from regulators should a full disposition occur."

BTIG analyst Walter Piecyk wrote that there are many potential outcomes in the auction. "What if Verizon spends $40 billion to buy all 50 MHz of the paired AWS-3 spectrum?" he wrote. "Not only would it add a turn of leverage on the balance sheet of Verizon, but Verizon might more aggressively argue that it does not need Dish's spectrum for the foreseeable future. We expect these statements from Verizon regardless of how much spectrum it buys and at any price."

Piecyk wrote that Dish Chairman Charlie Ergen might wind up paying $3 per MHz/POP for a chunk of spectrum in large urban markets. "Does the high price offset the increased strategic positioning of his asset position?"

At the same time, T-Mobile US (NYSE:TMUS) might pay more for spectrum in markets like Chicago and other markets where it needs spectrum, Piecyk wrote, "stretching its balance sheet at a time when it needs flexibility to buy low-band spectrum." He noted that paired spectrum in Chicago is bidding at $5 per MHz/POP with one license at $5.50.

"What if AT&T and Verizon pay up but still split the spectrum, revealing what they value spectrum at but not satisfying their intermediate, let alone long-term needs for spectrum?" Piecyk also asked.

TMF Associates analyst Tim Farrar wrote in a blog post that Ergen may have directed two allied designated entities, Northstar Wireless and SNR Wireless, to bid only a certain price per MHz-POP for a single license or bid an overall total dollar amount. However, he wrote that does not seem to be affecting bidding thus far.

Farrar wrote that a plausible bidding strategy could be for Northstar and SNR to bid in every round until they see high activity in the unpaired 1695-1710 MHz spectrum (which would be a sign that Dish had switched away from the paired spectrum), and then defend what they held, no matter the price of each license. Then, when they reached the overall dollar cap, they would drop the G block licenses first, then the H and I Blocks, but keep the J Blocks. Only the J Block is a 10x10 MHz paired spectrum block, while the others are 5x5 MHz 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," Farrar wrote. "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?" Farrar added. "We'll see in the next few days whether AT&T or Verizon are able to play Ergen at his own game."

Ergen has suggested Dish is thinking about putting its spectrum into a new unit or venture. Farrar wrote that if Dish does acquire a large amount of spectrum in the AWS-3 auction, it could put all of spectrum holdings into the new entity, and then raise debt against the combined spectrum portfolio. Dish then might be able to spin off that entity, or it could lease its spectrum holdings to other carriers.

For more:
- see this FCC page
- see this TMF Associates blog post
- see this BTIG blog post (reg. req.)
- see this NYT article
- see this WSJ article (sub. req.)

Special Report: AWS-3 spectrum auction primer: What you need to know

Related Articles:
Dish, FirstNet, tower companies and FCC are the early winners in wildly successful AWS-3 auction
AWS-3 spectrum auction bids soar to nearly $25.8B, and are likely to keep climbing
AWS-3 auction nets $16.4B in bids so far, with Dish as a wild card
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