SoftBank and Dish Network Will Buy Out Sprint, T-Mobile, and Clearwire
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dish Network (NASDAQ: DISH) is well on its way to capitalizing on growth opportunities in the mobility space. The company is determined to be a participant in mobile, and I don’t blame the company as network television isn’t likely to generate substantial growth in the future. The company’s growth has stagnated, making it important for the company to be a major distributor in mobile.
Dish buying out Sprint is unlikely
I don’t see a future in which Dish Network will buy out both Clearwire (NASDAQ: CLWR) and Sprint (NYSE: S). SoftBank, in a report, clearly lays out that, if the company were to buy out Sprint, it would be the most leveraged communication company in the world.
Dish Network would be the most heavily in debt of all of the telecommunication companies in the world if it bought out Sprint.
The company also plans to buy out Clearwire, which doesn’t sound realistic. Before Dish could buy out Clearwire, it would have to either dilute its floating shares significantly, or spend $6.6 billion. Either way, the deal is a loser for shareholders because the company has $7.2 billion in cash and cash equivalents to work with. If the company spends the cash on buying ClearWire, it will still need to borrow money to raise the remaining capital to buy out Sprint. Either way, shareholders are biting the pill with excessive leverage. The company simply cannot afford to buy both Sprint and Clearwire.
The real strategy
I don’t think Dish is planning to buy out both Clearwire and Sprint. The fact that Sprint’s board heavily favors SoftBank’s proposal over Dish Network’s proves that Dish Network’s strategy has to change if it wants to move into the mobile space. It also doesn’t help that it has to incur an additional $1.2 billion cost due to an amendable bond agreement between SoftBank and Sprint.
Source: Dish Network
If Dish Network was to merge with Sprint, the combined entity would have a clear advantage in terms of spectrum, but why would the company bother with Sprint when it can buyout T-Mobile (NYSE: TMUS)? I doubt the major holders of Sprint stock (institutional) will be jumping up and down over a deal that wouldn't be completed until the second half of 2014, when the company can instead accept a buyout proposal for June 25. Wait a week, or wait a year? Most discounted cash flow models would favor one week. Let’s not forget the strategic value of SoftBank from a strictly financial standpoint: less leverage, more capital, and better management. Greater economies of scale will favor Sprint.
The CEOs of both SoftBank and Dish Network are thinking about buying out T-Mobile. Sprint currently owns slightly more than 50% of Clearwire, giving it some access to the wireless spectrum, but not all of it. Clearwire has 132 MHz in spectrum. Right now, Sprint would benefit the most if it had 100% of the spectrum from Clearwire, and the cash from SoftBank to finance the capital expenditure for its 4G network. If Sprint, SoftBank, and Clearwire were to be a fully combined entity, it will be more competitive than Verizon and AT&T (based purely on a spectrum and financial strength standpoint).
The way it looks, I think that Dish Network will lose the bid for Sprint to SoftBank. However, I believe that Clearwire’s support for the deal with Dish Network will remain constant. Therefore, Dish Network will buy a significant stake in Clearwire, and will have to share ownership with Sprint. This means the ClearWire spectrum will be shared between Sprint and Dish Network. However, Dish Network doesn’t have any use for that much wireless spectrum, so it would technically have to buy out T-Mobile.
T-Mobile is currently the fourth largest carrier in the United States and also suffers from network quality issues. Currently, T-Mobile has a $16.2 billion market capitalization with a debt to equity ratio of 1.7 (Sprint’s debt to equity ratio is 3.8). This implies that the combined merger of T-Mobile and Dish Network will be less levered, giving it the leftover capital it needs for capital expenditure.
Sprint and SoftBank may have to contend with serious competition from the T-Mobile and Dish Network duo. Sprint recently filed a suit to fight off the Dish Network purchase of Clearwire's spectrum. Sprint used this as a dispute:
Dish Network has repeatedly attempted to fool Clearwire's shareholders into believing its proposal was actionable in an effort to acquire Clearwire's spectrum and to obstruct Sprint's transaction with Clearwire.
To be honest, I highly doubt Sprint will win this case because, to me, it sounds like a frivolous lawsuit that's being used merely to buy some time, perhaps long enough for Sprint to merge with SoftBank and use their combined resources to buy Clearwire.
Dish Network will have difficulty getting into the telecom space because of how leveraged it is.
There are two case scenarios: the first case is Sprint pairing up with SoftBank, and perhaps an eventual buyout of Clearwire using SoftBank’s excessive capital resources. The other possibility is Dish Network buying out slightly less than half of Clearwire, then buying out T-Mobile.
In the end, both SoftBank and Dish Network will participate in the United States telecom space.
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