The Decision on Dish Network is Long on Reward, Short on Risk
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m not a big fan of trading binary events, which is my subtle way of saying I don’t flip coins when it comes to my serious investment dollars.
What’s a binary event? It’s a specific event that only has two potential outcomes, one of which could be very good for a stock, and one of which could be very bad. FDA decisions on key drug developments, for instance, are frequently-traded binary events. While the potential upside move of 100% is compelling, the equally-likely downside move is just more risk than I care to take.
But what if you could take the vast majority of downside risk out of the equation without sacrificing the bulk of the upside possibility? Such scenarios are rare, but they can be found. Just ask the folks who’ve been watching Dish Network Corp. (NASDAQ: DISH) closely for a few months. The company’s walking – albeit indirectly – into a binary event of its own… a decision not from the FDA, but the FCC.
It would take far too many words to explain every nuance of the upcoming event, but I can do Dish Network justice with this quick snapshot of a rather complex matter. In simplest terms…
You know the capacity and network-overload problems at wireless companies like AT&T (NYSE: T) and Verizon (NYSE: VZ)? Basically, with the advent of smartphones, mobile customers are pushing the physical infrastructure of these companies to the brink. It’s not that there aren’t enough radio frequencies -- or "spectrum" -- out there to satisfy demand. But for them to be used to serve the mobile phone and mobile broadband market, the FCC would have to repurpose some of the lower-frequency airwaves currently reserved for other mediums to be used for mobile broadband, 4G purposes.
It’s a task that’s easier said than done, as the FCC has been fickle despite the wireless industry clearly running into a wall. And whether or not the FCC blesses such a request, any telco looking to garner more spectrum through an acquisition or partnership still has to win the approval of Department of Justice’s antitrust hawks. In fact, you may recall that’s why the proposed merger of AT&T and T-Mobile late last year (which was more about swapping spectrum and less about working together) fell apart -- the DOJ saw the union as the means to making something of a monopoly.
Point being, since the amount of useful spectrum is limited and now reaching its max capacity, those who own rights to certain radio waves are sitting on one (possibly) hot commodity.
Great, but what does any of this have to do with satellite-television company Dish Network? A lot, actually.
Care to guess who spent the last couple of years chasing down one telco bankruptcy after another in order to buy spectrum these defunct companies would no longer need? It’s Dish. All told, CEO Charles Ergen has spent $3 billion of the company’s money to snag a surprising amount of currently-unused spectrum, on the sheer hope that he could convince the FCC to allow those frequencies to power a new mobile broadband network.
It’s not been an auspicious start. In fact, the first time he made the request late last year, the FCC denied it. So what makes anyone think he’ll get a different result when he hears back about the resubmission of the request in the middle of this year? Well, believe it or not, things have changed -- the FCC as well as the DOJ seem a little more willing to accommodate now that we're a few months closer to hitting maximum capacity on the nation’s wireless networks.
The positive cue comes in the form of the DOJ as well as the FCC giving the green light to Verizon’s acquisition of a batch of cable television companies’ spectrum. Though the deal didn’t come without restriction, and though it’s not quite the same situation as Dish aiming to use a different set of radio frequencies to power a mobile broadband network, it does indicate that the DOJ is at least willing to acknowledge the spectrum-lockup may be making things less competitive rather than more competitive.
Said another way, it would be indirectly (though not directly) inconsistent if the FCC denied Dish its request to use its recently-acquired radio waves for the purpose of setting up a new mobile broadband network. It would also be a little pro-trust, so one has to believe that to the extent it can, the DOJ is going to lean on the FCC. A decision is expected this fall.
Got all that tucked away in your head? Great, here’s the "binary trade" part….
The upside and downside are clear. The upside is the FCC permits Dish to use cable television frequencies to power a yet-to-be built network. The downside is the FCC denies the request. But what do those two outcomes ultimately mean to shareholders?
Situations like this are tough to handicap, but there are some numbers that can be tied to both possibilities.
If Dish wins the FCC’s approval, Evercore Partners’ Bryan Kraft says Dish’s wireless network would be worth about $15.40 per share, and that’s on top of the per-share value of the company’s existing television business (which Kraft estimates to be worth about $22 per share). All told, he feels DISH shares are worth about $40 as they stand right now, and assuming the FCC grants the request. For perspective, shares are around $32.
If instead the FCC says Dish can’t build a new wireless network with its spectrum, well, that’s not to say someone else can’t do something with it. Spectrum is a limited commodity, and at the very least Dish can sell it (maybe even for a profit), or perhaps hang onto it for a time when the FCC is feeling a little more gracious. The only catch would be that Dish has to start doing something with a good portion of that spectrum within three years. Otherwise, it loses its rights to those frequencies. The requirement isn’t an unreasonable one.
Bottom line? There are a lot of ways for Dish to win, but even a loss isn’t really a loss, as Dish still owns the spectrum/asset at what may be less than market value. Were I a gambling man, I’d take that risk-versus-reward scenario.
jbrumley has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.