Market Insight

DISH makes $25.5bn Sprint counter-offer

April 14, 2013

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DISH Networks has made a counter-offer for Sprint Nextel, offering $25.5 billion for the carrier. The deal is split between $17.3 billion in cash and $8.2 billion in stock, a premium of 13% from Softbank's offer which consists of $12.1 billion in cash and $8 billion in new capital for a 70% stake in the carrier. Sprint shareholders would own 32% of the merged DISH/Sprint carrier, which combines the third pay-TV provider and the third wireless carrier in the US market. DISH believes that economies of scale could be worth up to $37 billion in synergies, saving in operating costs and new opportunities for revenues, as it looks to create a company which provides customers to be "always connected, in all ways".

With DISH's cash reserves topping the $10 billion-mark, the company was expected use this cash to improve its wireless offer, having always said that it needed a partner if it wanted to expand on its current spectrum holdings. DISH had put forward a counter-offer to Sprint for Clearwire, as a way to try and get both companies to the negotiating table and discuss a partnership. But with its offer likely to be rejected and leaving it with nothing, DISH decided that the best way forward was to make a full bid for Sprint, which is likely to fully own Clearwire in the short-term, and as such put itself in direct competition with Softbank for the carrier.

DISH sees strong growth potential in the areas of convergence, multiscreen and connectivity across all platforms, which it sees as the main rational behind the merger. Beyond the greater scale and efficiency a combined carrier would bring, DISH sees the possibility to offer content both in and outside the home as a clear differentiator, as the explosion for data traffic is led by video demand. The satellite provider has always wanted to enter the wireless market, to diversify its current offers and because wireless has seem the most sustainable growth in the US market. DISH has acquired spectrum over the years, but always realised it needed a partner to launch services as rolling out a network from scratch would have been both too costly and taken too long to realise.

Spectrum is crucial to the proposed transaction, as it has been in the US wireless market recently, as DISH hopes to combine its current holdings with those of Sprint and Clearwire, and create a carrier whose spectrum depth of 230MHz will dwarf its rivals in the market. The pay-TV company owns 45MHz of frequencies, split between 40MHz in the satellite 2GHz band and 5MHz in the unpaired E-block in the 700MHz band, which it acquired during the 2008 auction for $711 million. Coverage requirements mean it has to cover 35% of the population by mid-June, a condition it is likely to try to amend as part of its deal for Sprint. This would give the company spectrum in low, medium and high frequencies, with the 700MHz spectrum of special interest to DISH for differentiation, as it sees three segments with strong growth potential.

The first segment is bundling, as DISH could create a compelling quad-play opportunity in the US market. Multiplay services have lower churn than stand-alone services, but the other converged operators have yet to offer strong offers bundling both fixed and wireless services. The cable companies have abandoned their wireless aspirations and have decided on partnership with Verizon as part of their spectrum deal, while AT&T and Verizon have not pushed quad-play services even in areas where they offer fiber services. Opportunities do exist in that segment, with pricing and network quality of the utmost importance to attract consumers, while the cross-selling will also result in lower costs for acquisition, retention and marketing.

The second segment is fixed broadband, where DISH sees opportunities in underserved areas. Cable and fiber have focuses on the denser areas, leaving the more rural parts of the country with either basic DSL or no service. DISH wants to offer broadband through its outdoor antenna, bringing LTE to these homes as Verizon has done with HomeFusion. This would mean the service wouldn't directly compete with cable or fiber, and even DSL in some areas, technologies which are unlikely to be rolled out. It will however have to compete with similar fixed-wireless LTE services, which both AT&T and Verizon will look to roll out to more areas as they further reduce investment into fixed networks.

And the third segment is mobile TV or video, in which DISH will look to utilise its 700MHz holdings in the E block and provide an offer which is not currently on the market.  The carrier will use a broadcast system to provide services to end-users, and the combination of satellite spectrum will create an efficient hybrid network which will only need a point of signal for several devices. DISH can also leverage its spectrum to offer unlimited out-of-home video services, on top of specific content thanks to the rights it owns as part of its pay-TV strategy. If DISH decided to bundle video services as part of an overall plan for end-users, this could create strong competition for other carriers which have attempted to monetise data through either add-ons or greater usage with data caps.

DISH's offer will be put to Sprint's board, and should it accept it, Softbank will be allowed to make another competing offer for the company. The Japanese company is likely to remain present in the fight for Sprint, and DISH's deal could be seen as another way to get Sprint and Softbank to discuss partnerships, though in a much greater and confrontational scale than with the Clearwire counter-offer.  There are still many twists and turns to the story, but Sprint will have a new owner by the end of the year, with both prospective owners looking to create a different type of services to US customers. Dish will face some obstacles to its bid, and will need to invest heavily to ensure a strong quality of service to customers, but should DISH be successful with its convergence strategy, it will bring a different type of competition to the US wireless market, which is increasingly being split between the high-end premium offers of AT&T and Verizon and the value plans introduced by T-Mobile.

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