Game Change Time in Mobile; Enter Dish Network

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Things heated up this week in the telecommunications sector, with several companies making strides that will inevitably pay off for them and their shareholders in the long run.

These companies include Dish Network (NASDAQ: DISH), Sprint (NYSE: S) and Clearwire (NASDAQ: CLWR). While the developments for each of them are different, they all have set the stage for their paths to cross and the common denominator is spectrum.

This finite, precious resource is like gold to telecommunications companies, which is why just about every company in the space has been clamoring for it. Dreams of capitalizing (potentially hugely) on it finally came true for Dish this week, as the Federal Communications Commission gave approval for it to use the airwaves it purchased years ago to expand into the mobile phone business. Even the commission’s chair called the approval a “major step” in increasing competition in the mobile phone industry.

Any telecom worth its salt knows that mobile is the place to be as people are increasingly relying on their mobile devices to handle their day-to-day tasks. Cable and satellite-TV providers have traditionally not been in the space, as they’ve used the spectrum they have to beef up their services. However, over time they’ve seen the number of their subscribers decline, putting them in a quandary as to how to make money. This has inevitably led to them turning to the mobile space, using their spectrum to penetrate the market.

Dish’s efforts to enter the space had been hampered by the frustratingly slow pace of the federal government to give it approval. Even more frustrating, the satellite-TV provider has been sitting on the sidelines watching the main players in the mobile phone industry get spectrum approval, which has caused the competition gap to widen.

In fact, in August I wrote about Verizon receiving the much-needed approval from the Justice Department to buy spectrum from several cable companies for $3.6 billion. The approved agreement is a boon for Verizon for several reasons, with the main reason being it allows Verizon to stay a step ahead of its main competitors AT&T and Sprint.

So Dish will have its hands full upon offering wireless service. This is especially the case if recent moves by Sprint to acquire more spectrum come to fruition. Almost at the same time Dish and the FCC announced their spectrum approval news, Sprint further beefed up its offer to buy the remaining stake of Clearwire. The deal entails Sprint paying roughly $2.1 billion in cash. This amounts to $2.90 a share.

Sprint’s offer to buy the rest of Clearwire is part of a larger deal in which Sprint would be acquired by Japan-based Softbank. In order for this deal to go through, Softbank wants Sprint to buy its remaining stake in the smaller wireless carrier. The reason again goes back to spectrum.

The FCC’s approval for Dish’s spectrum plans throws a monkey wrench in any plans Sprint may have had to partner with Dish on a mobile service deal. This was the rumor ruling the stock of both companies earlier this month. At the time, Dish had made it clear that it would not proceed with any agreement with Sprint until it received word from the FCC about its spectrum request.

Observers say that the Sprint/Softbank deal will likely not close until the spring, with the Sprint/Clearwire deal closing shortly afterwards in the summer.

Investors reacted strongly positive to the news of the Sprint/Clearwire deal. During premarket trading on Thursday, Clearwire’s stock climbed 11% to $3.06, which is above Sprint’s offering price of $2.90 a share. This puts Clearwire in the driver’s seat; I can’t help but to think that Sprint will increase its offer. At the end of the day, it would have to because its deal with Softbank is contingent on it acquiring the rest of Clearwire.

Of all of this recent Spectrum business, Dish is a clear winner. I think back five years ago when its CEO, Charlie Ergen, first started his quest to expand the company’s offerings based on its spectrum. At that time, it was trading around $37 a share. Over time, it dropped to as low as $9 in 2008. Now it’s returned to $37.

Sprint will be bolstered through its deal with Softbank, which entails Softbank paying $20.1 billion to acquire 70% of Sprint. It will also infuse Sprint with $8 billion in new capital. As the third largest mobile carrier, this deal will allow Sprint to further ramp up its service and offerings to compete with number one Verizon and number two AT&T.

This new capital will definitely be needed because it is expected that Sprint's margins will be impacted from the costs it incurs in building out its 4G network. There are some concerns that its free cash flow will be depressed. According to an analyst quoted in The Street, Sprint's full takeover of Clearwire could cause its free cash flow profile to be cut by 15% in the years following the takeover.

A full takeover of Clearwire and the prospect that Sprint foots the bill on a cell-tower heavy nationwide 4G rollout may have a big impact on the company's margins. Notably, Sprint may see itself fall from generating some free cash flow in 2012 to none. In coming years, the proposed full takeover is forecast to cut Sprint's free cash flow profile by 15%, according to Moffett's calculations.

The bigger issue is whether Clearwire represents just one area where Sprint will have to dramatically increase its spending in coming years, depressing free cash flow.

 


TwillyD 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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