Dish plays down risks on Sprint offer

Dish Network Corp. chairman Charles Ergen is painting his $25 billion bid for Sprint Nextel Corp. as one that will enjoy a smoother ride with Washington regulators than the rival offer from Japan's Softbank Corp. Ergen, however, might be exaggerating the regulatory threat Softbank faces as well as glossing over some issues the U.S. Federal Communications Commission could have with his deal.

Ergen told analysts and reporters during a conference call Monday that as a foreign owner, Softbank would have to justify its bid for Sprint with the U.S. Department of Justice and other federal security agencies comprising Team Telecom, the government panel that examines foreign takeovers of U.S. telecommunications assets for national security threats. He also noted that it must be approved by the Treasury Department-led Committee of Foreign Investment in the U.S.

"We don't see an FCC issue in either one of the merger proposals for Sprint," he said. "But we certainly have an advantage on the Justice Department side because we don't go through a foreign ownership review. There would be no controversy with us as a U.S. company."

But actually, Dish's offer might face some hurdles at the FCC, which maintains a spectrum screen that loosely limits the amount of spectrum a single carrier can devote to mobile broadband in any one market. The FCC uses the screen to evaluate mergers between wireless license holders, but is not obligated to block a deal that exceeds the screen. The agency is currently examining whether it should set a rigid spectrum cap. If the agency goes that route, Dish might be required to divest some Sprint spectrum in various cities.

Ergen acknowledged the threat but said Softbank, whose acquisition of Sprint is well underway at the FCC, also might have to sell some of the spectrum Sprint is acquiring in its purchase of Clearwire Inc.--a deal related to the Softbank transaction.

"We don't think there's a divestiture issue but ... if we did have to divest spectrum, obviously it would just delever the balance sheet," Ergen said. He predicted that any spectrum cap would be higher than the current spectrum screen, large enough for AT&T Inc. and Verizon Communications Inc. to buy more spectrum, in fact, and would therefore pose little threat to a Dish-Sprint deal. However, Harold Feld, senior vice president at Public Knowledge, an advocacy group for digital consumer rights, said that AT&T and Verizon are likely to prod the FCC to count Dish's AWS-4 spectrum holdings, which the FCC allowed in December to be used for land-based broadband, toward the cap.

"Technically Dish could argue it's not part of the spectrum screen because it was not terrestrial spectrum when the cap formula was created," Feld said.

Feld said AT&T and Verizon do not truly oppose other providers' spectrum acquisitions but tend use them as opportunities to lobby for more liberal rules that will give them more room for their own acquisitions. The FCC might balk at giving them more room, he said.

An even more difficult question, he said, is whether to count spectrum that noncommercial users lease from Clearwire toward a spectrum cap.

Dish executive vice president for corporate development Tom Cullen said the FCC might be encouraged to take a more lenient view of Dish's offer because of its plan to use some of the added spectrum to offer broadband Internet service to areas neglected by cable and phone companies. "Our ability to provide broadband to parts of country that are not likely to see competitive broadband opportunities is something that will be of importance to the regulators," he said.

A group lobbying against consolidation in media and telecom, however, said consumers should not look to Dish's plan to create an amalgamated system with Sprint as a way to bring meaningful competition to Verizon and AT&T.

"These Frankenstein-style mergers among weaker players are no substitute for real competition in the mobile, broadband and video markets," said Free Press research director S. Derek Turner. "Until something is done about the market power that companies like Comcast, Verizon and AT&T abuse daily, consumers will be stuck paying higher bills for mediocre services. No merger at the bottom will do anything to change that reality."

Matthew S. DelNero, partner in Covington & Burling LLP's media practice, said both deals have some issues regulators will have to work through, but predicted both deals would get approval. The Softbank offer is somewhat easier from an FCC perspective, he said. He doubted that Dish, which has already asked the FCC to slow down its review of the Softbank offer, will succeed in getting a delay of its rival's offer. "The FCC won't slow down its ongoing review of Softbank-Sprint-Clearwire simply based on Dish's bid," he said.

On the foreign ownership front, some have predicted Softbank would face difficulty with CFIUS because of its business relationships with Huawei Technologies Co. and ZTE Corp., China's two largest makers of phone-network equipment that purportedly have ties to the Chinese military. Huawei has been blocked from doing some U.S. deals.

But in the end, Softbank is likely to face little more than a demand not to use Huawei equipment in its U.S. infrastructure, a demand the company has said it would comply with if ordered to.

The Dish offer for Sprint, as presented with a fixed exchange ratio on the stock portion of the bid, was worth about $6.90, with Dish shares off roughly $1.20, or 3%. Dish is offering $4.76 in cash, as compared to an implied $4.03 in the Softbank deal, according to the Dish proposal letter.

Either deal involves a stub equity that has uncertain value. Sprint shares closed up 84 cents, or 13.5%, to $7.06 on Monday.

Assuming Dish can convince Sprint that its deal can get financing, which should not pose a problem, the Dish offer is superior, a risk arbitrageur said. In that case, Softbank will likely come back with a revised bid of its own, he said.

The Dish deal has more leverage, but it also has real synergies and offers a premium, another arb said. That beats a lesser deal with less leverage but also less synergies, he said.