Analysts: Market is undervaluing Dish's spectrum holdings

The market continues to undervalue Dish Network's (NASDAQ: Dish) spectrum holdings, and Dish will continue to be part of M&A discussions through 2015, according to a report from by Jefferies analysts. The massive bids in the ongoing AWS-3 spectrum auction are contributing to the situation, they added.

In a recent research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that while Dish's stock has risen 9 percent since the start of the AWS-3 auction on Nov. 13, the company's shares are have fallen 12 percent in the past few weeks.

The analysts think the recent drop reflects concerns that Dish is bidding up values in the auction, and that it is not clear how Dish will monetize its existing spectrum holdings, particularly given its looming spectrum license buildout requirements. "However, in our view, the market is overly discounting the value of Dish spectrum, particularly in light of the ongoing auction as well as its flexibility (ability to convert a meaningful swath to downlink) and optionality (ability to group with adjacent spectrum)," they wrote.

The Jefferies analysts wrote that they "continue to see meaningful strategic value" for Dish's spectrum, and expect the value of Dish's airwaves to increase based on the uncertainty around the 600 MHz incentive auction in 2016 and "a dearth of attractive spectrum available elsewhere."

Notably, the analysts point out that ascertaining Dish Chairman Charlie Ergen's explicit intentions "is an exercise in futility," but they think it is unlikely that Dish will actually build out its spectrum. They think a tax-efficient spinoff of the spectrum into another entity or a direct sale of the company "are the most desirable outcomes as the tax bill of a direct sale could be as high as the EV of the standalone DBS business. Other monetization strategies such as long-term leases and partnerships are also possible, though less certain from an economic and operational standpoint."

The analysts note that "an investment in Dish hinges on appreciating spectrum valuations, and comfort that the company's visionary chairman and controlling shareholder, Charlie Ergen, has either a strategic plan or exit strategy to maximize shareholder value."

The incentive auction, currently scheduled for early 2016, will introduce "a key decision point for the wireless carriers, who will be forced to decide between acquiring spectrum (like Dish's) on the secondary market or participating in the somewhat uncertain broadcaster auction; what is certain is that there are few other sources of high quality spectrum on the horizon thereafter. We believe interest in Dish's spectrum, or the overall company, could emerge as the broadcaster auction approaches, though a strategic 'event' is not needed for Dish shares to appreciate in value."

The Jefferies analysts think Dish's 50 MHz of mid-band spectrum will increase in value to around $2.20 per MHz-POP. "We believe that our spectrum forecast could prove conservative given the higher quality nature of the Dish spectrum versus the spectrum offered at auction," they added.

Through 123 rounds in the ongoing AWS-3 auction, the average price for paired licenses was $2.63 per MHz-POP and just 39 cents per MHz-POP for the unpaired spectrum, according to an analysis by Stephen Wilkus at Spectrum Financial Partners.

Dish already controls 40 MHz of AWS-4 spectrum and 10 MHz of 1900 MHz PCS H Block spectrum. Dish's AWS-4 spectrum runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). Dish asked the FCC to let it use the 2000-2020 MHz band for downlink operations instead of uplink as a condition for agreeing to bid the reserve price in the H Block auction.

Related Articles:
Analysts: Bidding in NYC, LA and Chicago in AWS-3 auction is 94% above average prices
Analysts: Dish will have leverage over Verizon, AT&T if it scores paired AWS-3 spectrum
Analysts: As AWS-3 auction climbs past $34B, Dish's bidding raises questions about its strategy
Dish, FirstNet, tower companies and FCC are the early winners in wildly successful AWS-3 auction