Dish Network is reportedly in talks with banks about financing a bid for T-Mobile US which could include a cash component of up to US$15bn.
The bid would be comprised mostly of stock, with the cash component totalling US$10bn to US$15bn, according to…
Dish Network is reportedly in talks with banks about financing a bid for T-Mobile US which could include a cash component of up to US$15bn.
The bid would be comprised mostly of stock, with the cash component totalling US$10bn to US$15bn, according to media reports, although valuation issues could prove problematic.
T-Mobile’s controlling shareholder Deutsche Telekom would retain a large minority stake in the merged company, the Wall Street Journal reported.
However, an agreement is not imminent and may not happen, the report cited people familiar with the matter saying.
News that Dish and T-Mobile, the US’ second-largest satellite TV operator and fourth-largest mobile carrier respectively, are in merger talks emerged early this month. If a transaction materialises, it would be the latest in a series of mega deals that are changing the faces of the US telecoms and media sectors.
It remains unclear how much Dish might pay for T-Mobile, which has a market capitalisation of US$31bn. Dish, meanwhile, has a market cap of US$34bn.
The market valuation of the spectrum which Dish has amassed will be a major factor in determining whether the deal makes financial sense, analysts have noted.
Craig Moffett of MofettNathanson Research said that while he believes a Dish-T-Mobile deal is possible, arriving at a mutually-agreeable valuation will be challenging.
Dish has an enterprise value of about US$46bn, US$17bn of which can be attributed to the satellite TV business, based on a “very charitable” 6.0x EBITDA multiple, he said. The remaining US$29bn, therefore, can be attributed to spectrum.
In his view, benchmarking Dish’s spectrum in valuation terms against prices paid at the AWS-3 auction is flawed, particularly as it assumes the airwaves are being held for sale.
“In any scenario other than a sale, one would have to replace the comps-based valuation with a discounted cash flow calculation of whatever it is Dish would do with the spectrum.”
If Dish funds the deal with stock, the valuation versus the comparable valuations of its spectrum becomes irrelevant as soon as T-Mobile absorbs it, he argued.
“What’s left is simply T-Mobile’s valuation as a going concern … For the deal to be accretive to value, one would have to assume that T-Mobile’s valuation, presumably based on the expectation of higher cash flows arising from the new spectrum, would rise by more than US$29bn (separate and apart from the value of Dish’s satellite TV business).
This, he noted, assumes that the additional Dish spectrum would see T-Mobile’s valuation double, either thanks to a “staggeringly large” influx of new subscribers or “radically higher” ARPU.
Moffett said that paying in cash rather than stock would sidestep the issue, although he questioned how Dish would raise the cash, noting that it is already levered to about 4.3x 2015 EBITDA. Selling spectrum to the likes of Verizon does not make sense, he argued.
“First, why would Verizon choose to help Dish buy T-Mobile? And second, why in the world would there be a transaction at all if Dish had to sell a big chunk of the only asset that matters in the transaction, in order to do the transaction?”
In addition, the combined company would still need low band spectrum and therefore have to raise cash to take part in the upcoming incentive auction, Moffett said.
