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Dish deal could be AT&T's fallback position

by Chris Nolter | Published December 21, 2011 at 3:07 PM

With the termination of its $39 billion purchase of Deutsche Telekom AG's T-Mobile USA Inc., industry watchers are positing satellite television company Dish Network Corp. as an interesting plan B for AT&T Inc.

Shares of Dish rose sharply after the T-Mobile deal collapsed.

The key attraction would be wireless spectrum licenses that the Englewood, Colo., satellite television company has acquired or is acquiring.

Some observers are skeptical that chairman Charlie Ergen would sell the spectrum. So an outright takeover of Dish might be in order. While such a course might seem excessive, with spectrum in short demand AT&T can't afford to dismiss any opportunity.

Dish bought wireless licenses at a 2008 government auction for more than $700 million. It is also buying 40 megahertz of spectrum, collectively, from bankrupt communications providers DBSD North America Inc. and TerreStar Networks Inc. for a total payout of about $2.9 billion.

The spectrum held by DBSD and TerreStar would greatly enhance AT&T's capacity. But adding it won't be easy. For one thing, regulators may look askance at an acquisition and how AT&T would use the spectrum, according to Chris King of Stifel, Nicolaus & Co.

The DBSD and TerreStar licenses require the owners to operate a satellite component in their networks, providing coverage in areas where traditional wireless services are economically problematic.

Dish is seeking a waiver from the Federal Communications Commissions allowing it to forgo the satellite requirement.

LightSquared Inc. received a similar waiver in January, which was conditioned on the company's resolving issues related to interference with GPS systems. The interference has become a politically charged issue for LightSquared, backed by Philip Falcone's Harbinger Capital Partners.

The DBSD and TerreStar licenses are not adjacent to the spectrum that carries the GPS transmissions, so interference is not a question.

A waiver would mean a financial windfall for Dish because the spectrum would be worth much more to traditional wireless service if it did not have to be combined with satellite service. That prospect prompted a protest from AT&T.

The carrier argued in a letter to the FCC that a waiver would change "satellite spectrum with an ancillary terrestrial component [into] far more valuable terrestrial mobile broadband spectrum with an ancillary satellite service condition."

"Under these circumstances," AT&T wrote, "it would be contrary to the public interest to grant licenses for such repurposed spectrum without recovering for the public a portion of the increased spectrum value."

As a condition for a sale to AT&T, King suggested the government could require the company to surrender 10 MHz of spectrum. Regulators could also seek a "clawback" requiring Dish to pay the government the difference between the sale price and the price of similar spectrum at a future auction.

In a recent report, UBS Investment Research analyst John Hodulik suggested valuing the spectrum at 69 cents per MHz per person covered, the amount that Verizon Wireless recently agreed to pay a group of cable companies.

With a modest 10 MHz forfeiture, Hodulik estimated that the DBSD and TerreStar licenses would be worth $6.2 billion, or more than double what Dish paid.

The spectrum purchased in the 2008 auction would be worth a further $1.2 billion.

In a more dire scenario, Hodulik suggested, the FCC could conduct a formal rulemaking that would last two to three years, require greater forfeiture and place limits on who could buy the spectrum.

In a Dec. 15 letter urging the FCC to grant its waiver, Dish touted its ability to develop a network. The company said that the spectrum would be in the hands of "a well-financed, capable, and recognized innovator in communications technology with unique experience in developing a greenfield competitive mass-market service." Dish's 14 million customers would provide it with a market base.

At least one industry source believes Dish would be able to fashion a network. "Charlie likes to build things," this person said of Ergen.

But Bryan Kraft of Evercore Partners Inc. suggests that with about $3.5 billion already invested in licenses, Ergen would look for a partner.

Kraft also observed that Dish recently paid a $1 billion dividend.

"If Ergen were planning to build a network, he would need capital and probably would not have paid $1 billion in dividends," he said.

Despite a potential windfall, a sale of Dish's spectrum licenses to AT&T would help address spectrum needs as wireless broadband networks expand.

Lawrence Freedman of Edwards Wildman Palmer LLP said that, to some degree, regulators are sympathetic to AT&T's goal of increasing its spectrum holdings.

"They want to see this stuff deployed," Freedman said.

"The regulators will be judged, ultimately, on how the regulatory environment produces better results in the propagation of these devices and the deployment of mobile broadband."

The regulatory conflicts that AT&T encountered with the T-Mobile USA deal could give the carrier some insights into how to package a Dish acquisition to Washington.

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Tags: AT&T Inc. | Deutsche Telekom AG | Dish Network Corp. | T-Mobile USA Inc. | telecommunications

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