Dish's stock falls after reports that T-Mobile talks have stalled, $3.3B in AWS-3 bidding credits will be rejected

Dish Network's (NASDAQ: DISH) stock slipped following a report that said its deal talks with T-Mobile US (NYSE:TMUS) had stalled and a separate report indicating that the FCC is planning to reject $3.3 billion in spectrum bidding credits for two companies affiliated with the satellite TV provider. Dish's shares were down more than 3 percent in late-afternoon trading.

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

The Bloomberg report also said its sources indicated that the lack of momentum in the talks casts doubt over whether a deal will happen this year or at all as next year's planned incentive auction of 600 MHz broadcast TV spectrum looms. The FCC voted to approve bidding rules today that prevent joint bidding arrangements between nationwide wireless carriers, something that would likely bar Dish and T-Mobile from bidding together.

DT, which still holds 66 percent of the shares of T-Mobile, and Dish would want to forge an agreement in the next two or three months before focusing on the auction, the report said, and the stalling of the talks has made that timeframe unlikely. Both companies would be prohibited from talking to each other ahead of the incentive auction due to the FCC's anti-collusion rules.

DT has indicated it is not under any pressure to make a deal, and its executives have toed how successful T-Mobile has been in the U.S. market in recent quarters. "Is there some interest? Yes," T-Mobile CEO John Legere said recently on Bloomberg Television. "Is it one of a bunch of things that make huge sense in addition to this aggressive stand-alone plan that we have, gaining spectrum, or looking at other alternatives? Yeah."

Dish CEO Charlie Ergen said last month on Bloomberg Television that the company has  "other options that may be more attractive to our board and our shareholders."

"We're not feeling any pressure to do anything," Ergen said in an interview late last month with the Denver Business Journal.

Last year DT and Sprint (NYSE: S) parent SoftBank explored a potential merger between T-Mobile and Sprint but abandoned the deal amid regulatory opposition. In 2013 Dish made an ill-fated bid for Sprint, losing out to SoftBank.

Meanwhile, the FCC staff is recommending that the agency reject $3.3 billion in discounts that two Dish-affiliated designated entities applied for in the AWS-3 spectrum auction, which ended in January, according to the Wall Street Journal. The report, citing unnamed sources, said the FCC officials concluded that the two entities did not qualify for the small business discounts and violated the spirit of the FCC's auction rules. 

FCC Chairman Tom Wheeler said today at a press conference that he had circulated a draft order on the issue to his fellow commissioners, but he declined to discuss the substance of it. The FCC declined to comment further. A Dish spokesman declined to comment.

Dish participated in the AWS-3 auction through three entities: American AWS-3 Wireless, Northstar Wireless and SNR Wireless. American AWS-3 Wireless is a wholly-owned, direct-subsidiary bidding entity for Dish, and it did not win any spectrum in the auction, though it did make bids. Northstar Wireless and SNR Wireless, however, made $13.3 billion in gross provisional winning bids. Both Northstar and SNR bid as "designated entities," a designation that receives a 25 percent discount on spectrum purchases. The DE rules are aimed at helping small businesses, rural telephone companies and businesses owned by members of minority groups and women participate in spectrum auctions.

Thus, the Dish-designated entity partners are seeking $3.3 billion in discounts. However, the FCC has yet to grant the licenses to Northstar and SNR, in which Dish holds an 85 percent economic interest. Dish's designated entities bid for 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. Dish said it and its designated entities followed the rules, while other carriers, lawmakers and FCC Commissioner Ajit Pai have said Dish had gamed the system, and that a company that had $14.6 billion in revenue in 2014 could not plausibly claim to get a small business discount.

Bidding is anonymous during the auction, but Dish and the two entities stayed in contact with one another because they disclosed the arrangement in advance. Other carriers have accused Dish of collusion by communicating with the DEs during the auction, which they were allowed to do because they disclosed a joint bidding arrangement in advance. Verizon (NYSE: VZ), for example, told the FCC in April that it thought Dish and its two DE partners engaged in a "bidding ring, intended to drive out competitors and then suppress rivalry among the ring members." Verizon alleged that Dish and the two DEs bid against each other to create a "false perception that multiple other parties were interested in those licenses" and then when other bidders dropped out of bidding they avoided bidding against each other.

"This result is virtually impossible to explain in the absence of coordination and collusion," Verizon said.

Dish and the DEs said they followed the agency's rules.

If the DEs do not get the 25 percent discount, Ergen said in May that Dish would then be able to acquire the licenses at full price, and would need to forgo the discounts. He also said that if the DEs do not get the discount, Dish would not have to follow the FCC's rules for DEs that own spectrum. For example, he said Dish would be able to lease more than 25 percent of the spectrum.

The FCC just passed rules capping, for the first time, the amount of bidding credits small businesses and DEs could get in auctions--the incentive auction will be capped at $150 million. The FCC is also going to prohibit multiple applications by one party and by parties with common controlling interests, which would prevent a replay of Dish's AWS-3 strategy. The rules are not retroactive, however. 

For more:
- see this Bloomberg article
- see this WSJ article (sub. req.)

Related articles:
FCC passes rules on spectrum auction bidding intended to thwart replay of Dish's AWS-3 strategy
FCC's Wheeler proposes auction bidding rules that would prevent rerun of Dish's AWS-3 strategy
Dish's Ergen tells DBJ: 'We're not feeling any pressure' to make a deal
Reports: Dish looking for $10-15B in financing for T-Mobile bid
Report: DT CEO not keen on a T-Mobile/Dish merger, holds out hope for Sprint deal
T-Mobile/Dish deal could create a new bundle, but consumer interest might be tepid

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