Dish Is Throwing Its Money Away

Alvin 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 making headlines with its gigantic offer of $25.5 billion for Sprint Nextel (NYSE: S). Like most mergers, Dish’s proposed plan has some good points. However, the overall deal is bad and the argument against it is not a hard one to make.

The good

Mobile devices have become hugely popular and people use them to access content on the go. The mobile device market is still rapidly growing and Dish may be able to further penetrate this market by bundling its current services with wireless broadband. Also, Dish has 45 MHz of spectrum, but the company does not have a cellular network. The FCC approved the spectrum for cellular use with the condition that Dish provides service in at least 70% of its license region within seven years. A cellular network is expensive to build, so a merger with Sprint would solve that problem.

Furthermore, the merged company would have plenty of resources to compete against wireless provider titans AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). According to Dish, a Dish Sprint merger would give the company double the spectrum of AT&T or Verizon. Sprint owns 51% of Clearwire (NASDAQ: CLWR), which has 132 MHz of spectrum, and plans to buy the rest of Clearwire for $2.2 billion.

<table> <tbody> <tr> <td> </td> <td><strong>AT&T</strong></td> <td><strong>Verizon</strong></td> <td><strong>Dish</strong></td> <td><strong>Sprint</strong></td> <td><strong>Clearwire</strong></td> </tr> <tr> <td>Spectrum Holdings (MHz)</td> <td>106</td> <td>107</td> <td>45</td> <td>53</td> <td>132</td> </tr> </tbody> </table>

A combination of Dish, Clearwire, and Sprint would have 230 MHz of spectrum, which is more than what AT&T and Verizon have combined. Spectrum is valuable because mobile traffic continues to rise. Dish Chairman Charlie Ergen states,

“This combination will create the only company that possesses the spectrum portfolio and collection of owned network assets to provide customers a fully-integrated, nationwide bundle of in- and out-of-home video, broadband and voice services. This unique, combined company will have a leadership position in video, data and voice and the necessary broadband spectrum to provide customers with rich content everywhere, all the time.”

The bad

While the deal contains some positives for Dish, it is still a terrible deal. To put it simply, it is too expensive and too risky. Dish can talk all it wants about content, synergies, and spectrum, but at the end of the day it comes down to profits, and the numbers are terrible. Dish is essentially offering $25.5 billion for a wasting asset, an asset that lost $4.3 billion in year 2012. Check out the following table:

<table> <tbody> <tr> <td><strong>Sprint</strong></td> <td><strong>2012</strong></td> <td><strong>2011</strong></td> <td><strong>2010</strong></td> <td><strong>2009</strong></td> <td><strong>2008</strong></td> </tr> <tr> <td>Net Income (millions $)</td> <td>-4,326</td> <td>-2,890</td> <td>-3,465</td> <td>-2,436</td> <td>-2,796</td> </tr> <tr> <td>Stockholders' Equity (millions $)</td> <td>7,087</td> <td>11,427</td> <td>14,546</td> <td>18,095</td> <td>19,915</td> </tr> </tbody> </table>

From 2008 to 2012, Sprint lost approximately $16 billion, and the company’s equity declined 64%. The last profitable year for Sprint was 2006 and the situation is not improving. In Q4, Sprint lost $1.3 billion. The company is a money losing machine. Also, since Sprint only has $7 billion in equity, Dish will end up with about $18.5 billion of goodwill on its balance sheet, which is a huge overpay for a company losing billions of dollars. Sprint has trailed Verizon and AT&T for years, and it is unlikely that the merger would suddenly change that.

In addition, Dish is not equipped to absorb these large losses.

<table> <tbody> <tr> <td><strong>Dish</strong></td> <td><strong>2012</strong></td> <td><strong>2011</strong></td> <td><strong>2010</strong></td> <td><strong>2009</strong></td> <td><strong>2008</strong></td> </tr> <tr> <td>Net Income (millions $)</td> <td>637</td> <td>1,516</td> <td>985</td> <td>636</td> <td>903</td> </tr> <tr> <td>Stockholders' Equity (millions $)</td> <td>72</td> <td>-419</td> <td>-1,133</td> <td>-2,092</td> <td>-1,949</td> </tr> </tbody> </table>

From 2008 to 2012, Dish’s largest net income was $1.5 billion. Sprint’s smallest loss was $2.4 billion. Simple math dictates that the merger would result in an unprofitable company. Also, Dish's equity is only $72 million. Thus, Dish’s investment cost will likely be much higher than $25.5 billion because it will have to find a way to rapidly turn Sprint's business around. This means restructuring charges. Furthermore, a turnaround usually takes a few years to work, so a Dish Sprint combo will likely bleed money for at least a few quarters.

Also, while spectrum holdings are valuable, owning more spectrum rights does not make a company automatically more profitable. Just look at Clearwire, which owns more spectrum than AT&T or Verizon, but has been losing money for years. Also, Dish already provides content on the go with its Dish Anywhere service. Thus, Dish is gambling that bundling its services with Sprint will bring in more subscribers. There are other places for consumers to get content so this a risky bet. Overall, while a Dish/Sprint merger would have some good assets, this proposed merger has the potential to turn into an ugly mess and is not worth the risk.

Alvin Gonzales has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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