MoffettNathanson lowered its rating for Dish Network (NASDAQ: DISH), saying that while the company's mid-band spectrum is theoretically valuable, major U.S. carriers simply can't afford to buy it.
The value of Dish's spectrum has been the subject of much speculation in recent months as the FCC prepares to auction off 600 MHz airwaves and as carriers begin to experiment with 5G technologies. Kerrisdale Capital said last month that Dish was holding a "warehouse full of overpriced inventory" because mobile network operators in the U.S. already have ample spectrum, while Jefferies analysts responded that "carriers would show up in size" if Dish were to auction off its licenses, because mid-band spectrum are superior for supporting increasing data usage and ramping up capacity."
In a research note distributed to investors this morning, MoffettNathanson analysts don't dispute the desirable characteristics of mid-band spectrum; instead they question whether carriers that might be interested in it are actually in a position to buy it.
"(I)t is important to remember that auction theory requires an unlimited number of independent buyers. The spectrum market has but four… and at any given time, three have no money. And the fourth has no money," MoffettNathanson wrote. "We believe that the key to Dish's valuation lies not in what the spectrum is worth, but instead in what its potential buyers could actually pay. It is all well and good to market an asset to market, but if no buyer has the balance sheet to purchase it" then the valuation is irrelevant.
MoffettNathanson said that regardless of whether Verizon (NYSE: VZ) and AT&T (NYSE: T) are facing capacity limitations, both "face significant calls on capital going forward" that limit their ability to buy significant chunks of spectrum. Verizon has committed to "a dramatic densification campaign" that will significantly eat into capex, and AT&T will take on "a huge fiber build" in an effort to leverage its DirecTV acquisition. And both will need to invest heavily to use the AWS-3 spectrum they spent billions acquiring at auction last year.
Meanwhile, neither Sprint (NYSE: S) nor T-Mobile really need more mid-band spectrum, according to MoffettNathanson; instead they need the low-band airwaves that will begin to be auctioned off during the incentive auction next month.
Finally, MoffettNathanson analysts said the prospects for Dish to sell its airwaves to a player looking to jump into the wireless market are dim. Cable companies such as Comcast (NASDAQ: CMCSA) and Charter Communications (NASDAQ: CHTR) would likely leverage existing MVNO agreements for a wireless play, and Comcast will participate in the auction of 600 MHz airwaves that could provide "a high canopy 'coverage layer' for their mostly-Wi-Fi network." And potential newcomers such as Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG) signaled they aren't aggressively pursuing mobile when they opted not to participate in the incentive auction.
"As much as we respect and admire Dish Network and its Chairman Charlie Ergen, we suspect that Dish's exit options are more tightly constrained than many believe," MoffettNathanson analysts concluded. "The option to buy their way out of their spectrum position by using their equity as currency may already be gone. What is left is an outright sale – leasing the spectrum to a suitor would be accounted for as a sale for balance sheet purposes, so it's a distinction without a difference – and Dish's suitors simply don't have the strong balance sheets many believe them to have."
The analysts downgraded Dish Network to sell, setting a target price of $40. Shares of Dish were $49.60 just before the market opened this morning, down 2 percent from Monday's close.
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