Dish's Ergen: Decision on bidding credits was a 'complicating factor' in T-Mobile talks

Dish Network (NASDAQ: DISH) Chairman and CEO Charlie Ergen said that the FCC's likely decision to deny $3.33 billion in bidding credits to two Dish affiliates that won airwaves in the AWS-3 spectrum auction was the largest hurdle to any deal between Dish and T-Mobile US (NYSE:TMUS).

"From our perspective, the discount was the most complicating factor," Ergen said on Dish's second quarter earnings conference call.

Bloomberg reported in mid-July that, according to unnamed sources familiar with the matter, Dish's talks with T-Mobile parent Deutsche Telekom hit a snag over differences regarding valuations and the deal structure. The report said Deutsche Telekom told Dish what kind of offer it wants for T-Mobile and Dish was unable to meet DT's demands. Reports first emerged in early June that Dish and T-Mobile were in negotiations on a merger.

On the call, Ergen said that if the FCC does eventually decide to deny the bidding discounts, it "would complicate M&A and perhaps a way [so that] you couldn't do it."

Dish said last month that it, along with "designated entity" partners Northstar Wireless and SNR Wireless, received word from the FCC that the agency's staff is recommending the discounts be denied.  The FCC staff found that Dish does have a controlling interest in Northstar and SNR, and therefore Dish's revenues should be attributed to them, which in turn makes Northstar Wireless and SNR Wireless ineligible to receive the 25 percent bidding credits they applied for in the auction as designated entities (DEs).

Dish holds an 85 percent economic interest in both Northstar and SNR, which had reported revenue of less than $15 million and said that Dish didn't control them. The companies disclosed a joint bidding arrangement ahead of the auction, letting them communicate during the auction. Other carriers have accused Dish of collusion by communicating with the DEs during the auction.

Dish's designated entities made $13.3 billion in gross provisional winning bids and won 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. If the credits are denied, Northstar would be on the hook for $1.96 billion in additional payments, while SNR would need to pay $1.37 billion.

While praising the competency and work ethic of the staff of the FCC, Ergen said that the FCC "picks winners and losers," that Dish believes it was following the rules and that if the FCC does ultimately decide to deny the credits it will be sending a clear signal to Dish. 

"So, to the extent that the FCC would say, no, we want you disruptive in the marketplace but not in an auction, and if we're going to side with the big guys and disallow the discount, then that's a pretty strong signal that you're probably not going to get into the marketplace in a competitive way as a new entrant," Ergen said, according to a Seeking Alpha transcript. "And it probably means that even in an M&A situation, you're going to have a lot of difficulties. There's more risk than we would anticipate."

In that case, Ergen said, Dish would likely be pushed more toward leasing or selling its spectrum, even though that is "not in our heart where we wanted to go," in terms of entering the wireless market. Ergen also said that Dish is examining its corporate structure and that "it looks like it may be more attractive at some point to split our video business away from our spectrum business."

"We believe that splitting up Dish's assets and leasing or selling the spectrum has moved to the forefront of Ergen's available options," BTIG analyst Walter Piecyk said in a blog post. "That means separating the satellite business from the spectrum assets and could also entail breaking up the spectrum into different units, perhaps to achieve more favorable tax treatment on sales" 

If Dish or the DEs wind up paying the $3.3 billion, Ergen noted that it would remove restrictions on the AWS-3 spectrum in terms of how much of it could be leased. Since other carriers, including T-Mobile, AT&T Mobility (NYSE: T) and Verizon Wireless (NYSE: VZ), will be looking to deploy AWS-3 spectrum in the next few years, it will not cost them much to add Dish's AWS-3 spectrum to equipment on their cell towers.

Dish already controls 40 MHz of mid-band AWS-4 spectrum and 10 MHz of 1900 PCS H Block spectrum. Tom Cullen, Dish's executive vice president of corporate development, said the 3GPP is currently working to incorporate Dish's AWS-4 spectrum into a new band that would also include AWS-1 and AWS-3 spectrum. He said that is on track to be "confirmed and finalized in December of this year."

Dish's AWS-4 spectrum runs from 2000-2020 MHz (for uplink operations) and 2180-2200 MHz (for the downlink). However, Cullen noted that Dish has the option, until June 2016, to decide whether to convert its uplink spectrum into downlink spectrum, which it is likely to do.

Piecyk said that "AT&T would be an obvious buyer" of the low-band 700 MHz spectrum Dish controls, "as it would complete their existing and unused low-band spectrum." He added that all other carriers "would have interest in the multiple blocks that could be created by the mid-band spectrum. Sprint appears to have withdrawn its spectrum from possible sale to its competitors and use it for small cell backhaul instead, reducing available supply, but more importantly, demonstrating yet another use for spectrum that can be used to expand operating margins. T-Mobile may be more focused on using its balance sheet for the incentive auction than bidding on Dish's spectrum at this time, but they run the risk of losing access to this spectrum forever if they do not bid."

For more:
- see this release
- see this Seeking Alpha transcript
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this CNET article
- see this BTIG blog post (reg. req.)

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