Dish's DEs give up $3.4B in AWS-3 spectrum, but Ergen's Verizon strategy remains intact

Dish Network's (NASDAQ: DISH) designated entities (DEs), in which Dish holds an 85 percent economic stake, agreed to give up around a third of the paired AWS-3 spectrum licenses they won earlier this year in an FCC auction -- mostly spectrum licenses covering New York, Chicago and Boston. Analysts from Jefferies noted that the companies' abandoned licenses dovetail with AT&T (NYSE: T) and T-Mobile US (NYSE:TMUS) coverage areas, but leave open the prospect of a transaction with Verizon (NYSE: VZ).

The licenses that Dish's DEs are relinquishing represent around $3.4 billion worth of their winning bids; they will keep about $9.8 billion worth of the licenses they won at the auction.

While the news represents somewhat of a setback for Dish chief Charlie Ergen, BTIG analyst Walter Piecyk said that the actions "have zero impact on the possibilities for spectrum transactions or strategic options by Dish."

Dish's two DEs, Northstar Wireless and SNR Wireless, made $13.3 billion in gross provisional winning bids for 702 licenses during the FCC's AWS-3 spectrum auction earlier this year. Only AT&T spent more money in the event. The DEs hoped to receive a 25 percent small-business credit, lowering their total expense to around $10 billion, but the FCC ruled that they should not receive the discount since the agency said they are effectively controlled by Dish. (Dish disagrees with that ruling and the issue is currently in court.)

Nonetheless, Dish's DEs agreed to return roughly 200 spectrum licenses to the FCC and pay a $413 million penalty for the move. They will keep around 500 licenses.

As Piecyk noted, there are four key 10 MHz spectrum licenses that the DEs are giving up:

  • The New York I Block license worth $1.3 billion; AT&T was second highest bidder.
  • The Chicago G Block license worth $509 million; T-Mobile was second highest bidder.
  • The Chicago H Block license worth $583 million; AT&T was second highest bidder.
  • And the Boston G Block license worth $166 million; AT&T was second highest bidder.

Combined, the four licenses accounted for 75 percent of the value of the licenses that Dish's DEs are giving up, and 38 percent of the total spectrum they are giving up.

"We believe that DISH chose several popular Tier 1 city licenses to minimize the risk of having to pay a meaningful amount of further incremental fees," Jefferies analysts said in a research note to investors. "In all of these markets the company had acquired an extra 5MHz license, limiting the marginal impact to the overall AWS-3 spectrum portfolio. It is also possible that the selected licenses were chosen in such a fashion as to not impact a potential future sale of the portfolio to Verizon. The selected Tier 1 licenses tend to be contiguous with existing AT&T and T-Mobile spectrum positions."

Verizon executives have repeatedly indicated they are open to a transaction with Dish.

As for the 200 licenses Dish's DEs surrendered, the FCC now can re-auction those licenses -- but Piecyk said that process could take up to two years. Moreover, Dish and its DEs will be able to participate in a re-auction of the licenses they relinquished -- but if the licenses sell for less than the $3.4 billion they paid for them during the AWS-3 auction, Dish's DEs will have to pay the difference.

"The returned AWS-3 spectrum represented 5% of Dish total available spectrum and the paired AWS-3 spectrum they are keeping represents 11% of their existing spectrum position," Piecyk said. "We continue to believe that Dish's AWS-4 spectrum, which represents 53% of its spectrum portfolio and can be used entirely for downlink, has far greater value to wireless operators than the AWS-3 spectrum that was sold for $2.71/MHz/POP."

Despite returning the $3.4 billion worth of AWS-3 licenses, Dish continues to sit on a massive pile of spectrum that Ergen could either sell or build out into a network. Analysts continue to believe that Verizon, AT&T, T-Mobile US or another entity like a cable operator might be interested in a transaction with Dish for its spectrum.

However, Piecyk said that the FCC's upcoming incentive auction of TV broadcasters' 600 MHz spectrum could complicate matters, particularly as potential bidders enter the FCC's quiet period for the event in January.

For more:
- see this Dish release
- see this WSJ article
- see this Bloomberg article
- see this BTIG post

Related articles:
Dish's DE partners get extension from FCC to make $3.3B in payments on AWS-3 spectrum
Verizon's McAdam: We're open to talking to Dish about spectrum-- but won't buy whole company
FCC denies Dish partners $3.3B in bidding credits in AWS-3 auction