Dish Network (NASDAQ:DISH) CEO Charlie Ergen has suggested the controversy over the US$3.3bn in discounts sought by its affiliates at the recent AWS-3 spectrum auction made a merger with telco T-Mobile US (NYSE: TMUS) impossible. Speaking during a…
Dish Network (NASDAQ:DISH) CEO Charlie Ergen has suggested the controversy over the US$3.3bn in discounts sought by its affiliates at the recent AWS-3 spectrum auction made a merger with telco T-Mobile US (NYSE: TMUS) impossible.
Speaking during a conference call on the company’s Q2 2015 results, Ergen said the FCC has told the US DTH firm it will deny the designated entity (DE) discounts sought by the two affiliates, North Star Wireless and SNR Wireless.
He argued that allowing the discounts would have “created a lot of opportunity within the M&A space to get stronger people to compete against the top two guys [telcos AT&T and Verizon], which really have a duopoly today”.
The uncertainty surrounding the discounts, he said, has made it “virtually impossible” for Dish to engage in M&A.
Merger talks between Dish and T-Mobile reportedly stalled due to disagreements over valuation and deal structure. Determining the value of the huge amount of spectrum Dish has amassed, but not deployed, was considered to be a major stumbling block.
Ergen contended that Dish played by the rules to obtain the discounts and that disallowing them means AT&T and Verizon will probably end up with “virtually all” the AWS-3 spectrum.
“That’s horrible from a competition point of view,” he said.
He speculated that, if the discounts are disallowed, a merger between T-Mobile and Sprint, the two smallest wireless players, looks more realistic.
“That’s probably where the world goes and it’s all based on one decision and one auction where the government picked winners and losers,” he lamented.
Ergen said the government is indicating that it would be all right for Dish to lease or sell its spectrum, but added that “that’s not in our heart where we wanted to go”.
“In my heart, the best long-term thing is to compete with the big guys,” he said. “But we won’t get there without government support. If the big guys can get congress to write letters and the FCC to make decisions, we can’t compete.”
Dish bought US$13.3bn worth of spectrum via the two affiliates at the auction, which prompted the FCC to review the rules surrounding discounts for DEs and small businesses. Dish has insisted that others have used similar DE investment structures at previous auctions.
Next steps undecided
Ergen said Dish has yet to decide whether it would pay back the US$3.3bn in discounts to keep the licences, return the spectrum and incur a penalty, or file a lawsuit.
Paying back the money could be the simplest route, Ergen suggested, saying “it would eliminate some of the very negative handcuffs on the spectrum if, for example, you could sell it, you could lease it … which you can’t really do under the restrictions today”.
Not paying would incur an immediate 15% penalty, which could increase long-term if the spectrum is re-auctioned at a higher price, he added.
“So, you would owe couple billion dollars and in theory you’d get your money back and life would go on.”
Alternatively, the company could sue the FCC, although it may be required to pay back the US$3.3bn beforehand, he said.
“I don’t know exactly whether you would pay and then sue or just sue or whatever. I don’t think we know until we see the order. I think you’d have to be prepared to pay and sue if that was the route you decided to go.”
Last month, FCC chair Tom Wheeler circulated a draft order to deny the 25% discounts, stating that Dish’s controlling interests in the two affiliates means its own revenues must be attributed to them. This would mean the affiliates’ revenues exceeded the threshold to qualify for the discounts. However, the draft order states that the affiliates are allowed to hold the AWS-3 licences.
Dish said in a SEC filing yesterday that if the FCC grants the affiliates the licences, it may need to provide them with “significant additional loans”. For this and other reasons, the satellite TV company may need to raise “significant additional capital” in future, which may not be available on acceptable terms or at all, it added.
Ergen said on the call that it is “too early to tell” whether this additional capital will be required.
Wells Fargo analyst Marci Ryvicker said she thinks it is highly unlikely that Dish will surrender the AWS-3 spectrum given the fees associated with doing so, adding that she senses it is also leaning toward participating in the 2016 incentive auction.
Dish reported revenues of US$3.83bn for Q2 2015, up 3.8% year-on-year. Its net income rose to US$34.4m from US$213.m a year earlier. The company said it closed the quarter with 13.932 million pay-TV subscribers, compared with 14.053 million subscribers at the end of Q2 2014. Its Sling TV video streaming service added 169,000 subscribers as of March 31, the company said.
FCC sets stage for next spectrum auction
The FCC has approved rules for its next spectrum auction, denying a request from T-Mobile to set aside a bigger slice of airwaves for smaller carriers.
The regulator said reserving 30 MHz of spectrum within the 600 MHz band was sufficient to promote competition in next year’s Incentive Auction. T-Mobile had petitioned to increase the reserve for providers who hold less than one-third of the spectrum in a given licence area to at least 40 MHz.
“Commission policies related to the spectrum reserve are designed to strike a balance among a number of objectives, including making additional low-band spectrum available to multiple providers, ensuring that all bidders have an opportunity to acquire a stake in the 600 MHz ecosystem, and ensuring competitive bidding,” the FCC said.
“The reserve is designed to protect against excessive concentration in holdings of low-band spectrum, while also promoting competition by bidders for both reserved and unreserved spectrum.”
The FCC, which is expected to release it final order next week, also confirmed the proposed average price and spectrum benchmarks of US$1.25 and 70 MHz of licensed spectrum, respectively.
It scheduled the auction to begin on 29 March 2016, when carriers will be able to bid for low frequency spectrum for the first time since 2008.
