Report: Dish, T-Mobile in merger talks; Legere would lead combined company

Dish Network (NASDAQ: DISH) and T-Mobile US (NYSE:TMUS) are in merger talks and are in agreement on what a combined company would look like, according to a Wall Street Journal report.

The report, citing unnamed sources, said Dish CEO Charlie Ergen would be the company's chairman and T-Mobile CEO John Legere would be the CEO of the combined firm. However, the report said that some of the important elements of the deal, including the purchase price and the mix of cash and stock that would be used to finance the transaction, are up in the air.

One source told the WSJ the talks are at "the formative stage," and said an agreement might not be reached. T-Mobile has a market capitalization of about $31 billion, while Dish's stands at around $33 billion, so a deal would likely be quite large.

A Dish spokesman declined to comment while representatives from T-Mobile did not immediately respond to requests for comment.

Deutsche Telekom CEO Timotheus Hoettges said last month the company will consider any partnership for T-Mobile that can improve profitability at the carrier. Hoettges said at the company's annual shareholders meeting that T-Mobile, which Deutsche Telekom still has a 66 percent stake in, was in much better shape than two years ago when it started its "uncarrier" initiative.

"But it is our duty to go on improving the return on T-Mobile US," he said, according to Reuters. "If we find a partner who will help us to do so, we will obviously consider it."

Ergen has repeatedly praised Legere and T-Mobile's management team for turning it into a powerhouse of growth. T-Mobile added 8.3 million total customers in 2014, leading the industry, including 4.9 million branded postpaid customers. T-Mobile expects to add between 3 million and 3.5 million postpaid customers in 2015.

However, Ergen has also left all of his options open in terms of wireless and Dish has held talks with multiple companies in the industry recently. According to financial analysts who attended a meeting with Dish's management this week, Dish thinks it could partner with a carrier, sell its spectrum, acquire a carrier or move to a wholesale model--and the satellite company does not see those options as mutually exclusive.

Dish controls 40 MHz of mid-band AWS-4 spectrum in the 2 GHz band and 10 MHz of 1900 PCS H Block spectrum. Dish's designated entity partners won 25 MHz of spectrum in the FCC's recent AWS-3 auction, though the FCC has not yet awarded those companies the spectrum licenses.

Macquarie Research analyst Kevin Smithen wrote in a research note that Deutsche Telekom "holds the keys to T-Mo and that there are no guarantees that minority shareholders will be happy with the price in what is likely to be a mostly-stock deal with a 12-15 month regulatory review with required spectrum divestitures of at least 20-30 MHz, in our view." 

Smithen added that "we like the commanding spectrum position of the combined company although we don't think this is what the FCC had in mind for Dish's spectrum (preferring a buildout) and will most likely require substantial spectrum sales." 

Evercore ISI analysts Jonathan Schildkraut and Justin Ages wrote in a research note that there is a "solid strategic rationale" for a Dish/T-Mobile deal, including the combination of significant spectrum resources (T-Mobile has roughly 84 MHz of spectrum and Dish has roughly 81 MHz, with both having concentrations in the AWS and PCS bands plus a little 700 MHz), as well as the ability to deliver wireless broadband to rural markets. The Evercore analysts added that the deal would add significant spectral capacity to T-Mobile's network in urban and more densely populated suburban markets, and the companies also have "a strong cultural fit (based on market disruption and addressing customer pain points)."

However, Jefferies analyst Mike McCormack wrote in a research note that while a deal is "financially possible under numerous scenarios, particularly with spectrum divestitures, we question the strategy for Dish, given the new business opportunities offered by the transaction would have to trump the potential return from an eventual sale of the spectrum. A partnership scenario is also possible." He noted that the deal structure remains uncertain as well. 

This would not be the first time Dish tried its hand at M&A in wireless. In 2013 Dish unsuccessfully bid for Sprint (NYSE: S) and Sprint partner Clearwire. SoftBank eventually outbid Dish for Sprint, which acquired Clearwire.

A Dish/T-Mobile deal would likely face less scrutiny from regulators than T-Mobile and Sprint's aborted attempt to merge last year, in part because Dish and T-Mobile do not compete and because it could create a stronger wireless carrier. That line of reasoning is likely why AT&T's (NYSE:T) deal for DirecTV (NASDAQ: DTV) will get approved.

"We do not see any significant [regulatory] hurdles and note that issues around spectrum ownership depth in certain markets (which is not a given) are usually addressed through divestitures," the Evercore analysts noted. 

Yet the timing of the deal would raise concerns. Both Dish and T-Mobile are expected to bid in next year's incentive auction of 600 MHz broadcast TV spectrum, which is expected to start in the first quarter of 2016. Even if a deal were announced this month, it's unclear if it would be approved by the FCC and Department of Justice ahead of the auction or how it might affect the auction's rules and other carriers' participation. T-Mobile has said the FCC should permit joint bidding arrangements for the auction.

In a filing with the FCC last month, T-Mobile said that the FCC "should continue to permit joint bidding arrangements that allow entities--including nationwide carriers--to join together in a joint venture or similar entity to bid in an auction as a single bidder."

"To the extent that the Commission determines to limit bidding joint ventures among nationwide carriers, however, T-Mobile agrees with Sprint that the Commission should carve out an exception for the 600 MHz auction to permit such arrangements in Partial Economic Areas where the participating parties collectively hold less than 45 MHz of low-band spectrum on a population-weighted basis," T-Mobile added. "As Sprint notes, this exception is consistent with the Commission's approach to evaluating spectrum concentration in the wireless marketplace, particularly for valuable low-band spectrum."

T-Mobile also suggested that "to the extent two or more entities want to coordinate their bidding activities in the same geographic market, they may form a bidding consortium that allows them to channel their bidding activity through a single entity, and then divide licenses after the auction."  

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

Related Articles:
Analysts: Dish execs say wireless options, including wholesale or partnership, are not mutually exclusive
Analysts: T-Mobile/Dish deal still the most likely M&A option for the carrier
DT CEO open to any deals that would improve T-Mobile's profitability
Report: Dish looking to hire CMO to help jumpstart wireless push
Dish's Ergen again praises T-Mobile, says Dish could jump into cloud-based wireless world

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