Down But Not Out – DISH Networks Still Worth over $100

Disclaimer– This article is for informational purposes and does not constitute financial or other advice.  Please consult with your financial advisor before making any investment decisions.  Please read full disclaimers here.  Author of this article owns DISH stock.


Long-term investors are being given an excellent opportunity to take advantage of short-term weakness in DISH Networks (DISH), which is currently trading at $66 but is worth well over $100.  Recent events are narrowing the options that Ergen may ultimately pursue, and as a result, a spin-off of the spectrum is becoming an increasingly viable option for DISH.

History

Charlie Ergen, CEO of DISH, saw the writing on the wall over 6 years ago as he recognized that pay TV is a mature business and is going to decline as consumers begin viewing more and more content online.  He realized that DISH needed to evolve and to take advantage of a shift in viewing behavior to over the top, including wireless devices.  Ergen, recognizing the growing demand for wireless data, began acquiring wireless spectrum licenses which gives wireless carriers the right to transmit signals at specific frequencies in specific geographies.

Over the last six years, Ergen has acquired billions of dollars of spectrum including $13Bn worth of spectrum in the recently concluded AWS-3 wireless auction.  Despite the tremendous amount of value created over six years of smart spectrum acquisitions, investors have become fed up waiting for Ergen to pursue a strategy to put their spectrum to work.

Ergen has laid out a number of options in putting the spectrum to work: 1) sell the spectrum, 2) sell the company, 3) acquire a wireless carrier and build out their spectrum, 4) partner with a wireless carrier to build out the spectrum, or 5) spin-off their wireless spectrum into a separate company.

However, Ergen’s options seem to be running out.  Ergen has attempted to acquire Sprint (failed to do so) and is attempting to acquire T-mobile (Bloomberg recently reported talks have stalled).  Given AT&T’s acquisition of DirectTv, AT&T is an unlikely acquirer of DISH.  Verizon has repeatedly stated that they are not interested in acquiring DISH although they have expressed interest in DISH’s spectrum.

Investors have lost patience waiting for Ergen to take action on realizing the true value of his spectrum, and this presents long-term investors with an opportunity to buy wireless spectrum at a deep discount to its true value.

Path Forward

The consensus view on DISH is that there is no greater clarity on their spectrum strategy today vs. one or two years ago.  However, I believe the passage of time has increased the visibility of what Ergen will ultimately do.

First, Ergen has repeatedly stated that he wishes to enter the wireless business.  Based on these comments, we can assume that a straight sale of the spectrum or company is lower on his list.  Second, opportunities to enter wireless through an acquisition of a carrier have basically not worked.  DISH has been unable to acquire Sprint and appears it will be unable to acquire T-mobile.

Therefore, assuming T-mobile falls through, the only remaining options are to 1) partner with a wireless carrier to build-out its spectrum or 2) to spin-off its spectrum into a separate spectrum company (“SpectrumCo”).  And as we think about DISH’s path forward, it seems to make sense for DISH to pursue a spin-off strategy ahead of negotiating with potential wireless partners.

One of the reported roadblocks to a T-mobile deal was that T-mobile expressed concern that the value of DISH’s equity may come under pressure as investors stop valuing spectrum separately in a combined company scenario.  However, I believe if DISH were to spin off its spectrum, investors would have an easier time ascribing a true market value for a spectrum pure-play company.

Valuation of Spectrum Co. + DISH

Currently, the market is pricing DISH’s spectrum at approximately $1.20 per MHZ Pop vs. the AWS-3 auction price of $2.71.  See below for the back of the envelope math on arriving at the implied $1.20 per MHZ Pop.

DISH-SOTP

I believe the market is applying a large discount to the AWS-3 auction prices for a number of reasons including 1) perception of inflated AWS-3 prices as a result of DISH involvement, 2) uncertainty on how DISH will put the spectrum to work, and 3) uncertainty on timeline for implementation of a spectrum strategy.

If DISH were to spin off its spectrum into a separate company and communicate a plan (such as building and selling wholesale capacity), investors would have greater certainty on a timeline and strategy to create value from its wireless spectrum.  Although investors still may not know the true market clearing price for spectrum, it is unlikely that $1.20 is the right number.

I believe investors would value Spectrum Co in a worst case as the market clearing price for spectrum (which will likely go up over time as wireless data needs increase) or in an upside case, as the value of the wireless business DISH is able to create.  In other words, if DISH were to fail to create a profitable business, there is a floor value at which the spectrum could be sold off to the other wireless carriers.

DISH-Spectrum

For investors, a spin-off of the spectrum would likely create an immediate re-rating in the valuation of the spectrum.  But, importantly for Ergen, he will be able to maintain his options including selling a portion or all of the spectrum, partnering with a wireless carrier, or building a wholesale network (which are not mutually exclusive options) while improving his negotiating position by virtue of controlling spectrum at a higher valuation.  For example, negotiating a spectrum lease on spectrum valued at $2.00 Mhz/Pop may yield a better result than negotiating a spectrum lease on spectrum valued at $1.20.

Summary

It is easy to see why Ergen believes the market is materially undervaluing his spectrum and his stock.  Before the AWS-3 auction, Ergen believed the auction would serve as a catalyst to re-price his spectrum value and give him the ammunition to pursue wireless deals.

Since the auction failed to re-rate DISH’s spectrum value and since DISH’s undervalued stock price is likely an impediment to any deals today, I believe Ergen may look at alternative pathways to creating value including a spinoff of DISH spectrum.



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