AT&T’s Need for Spectrum Signals 77% Premium for Dish: Real M&A

Facing opposition from U.S. regulators, Dallas-based AT&T last month abandoned its deal for T-Mobile USA that would have increased the largest U.S. telephone company’s 4G spectrum capacity 62 percent, helping its higher-speed LTE network compete with Verizon Wireless. Now, AT&T may consider a bid for Dish after the second-largest U.S. satellite-television provider acquired airwaves from the bankruptcies of DBSD North America Inc. and TerreStar Networks Inc. that could give AT&T two to four more years of capacity, said Stifel Nicolaus & Co.

With the industry facing network constraints and a scarcity of new spectrum that’s making Dish a target, President and Chief Executive Officer Joe Clayton says the company is open to future acquisitions. At $50 a share, cited as a reasonable price by Alpine Mutual Funds, AT&T would have to pay a 77 percent premium for Dish, the highest in an acquisition greater than $5 billion by a telecommunications company since 2000, according to data compiled by Bloomberg.

“AT&T wants to get more spectrum,” Roger Entner, a Recon Analytics analyst in Dedham, Massachusetts, said in a telephone interview. “They are a year behind Verizon in the LTE race. Dish would undoubtedly be a good combination and it would solve a lot of AT&T’s problems.”

Today’s Trading

Brad Burns, a spokesman for AT&T, and Marc Lumpkin, a spokesman for Dish, declined to comment on market speculation.

Shares of Dish climbed 2.3 percent to $29.41 at 9:36 a.m. in New York, the biggest advance among 33 stocks in the Bloomberg Americas Media Index. AT&T rose 1.2 percent to $30.42.

Dish is open to a potential acquisition once it builds out its wireless telephone and entertainment businesses, the Englewood, Colorado-based company’s CEO Clayton said last week.

“We’re open to all possible options,” Clayton said in a Jan. 11 interview on Bloomberg Television’s “Bloomberg West,” responding to a question on future merger possibilities. “We could be acquired or we could be the acquirer.”

The wireless industry’s profit margins are being pressured by slowing subscriber growth, equipment costs, smartphone subsidies and the need to buy more airwaves to keep up with consumers’ increasing use of mobile devices for video-watching and Web-browsing. AT&T Chief Executive Officer Randall Stephenson, 51, said spectrum relief was the main reason for the T-Mobile offer.

Future Deals

Industry consolidation is likely and, in addition to Dish, targets include MetroPCS Communications Inc. (PCS), Leap Wireless International Inc. and Clearwire Corp., Philip Cusick, a JPMorgan Chase & Co. analyst in New York, said in an interview.

MetroPCS and Leap, which attempted a merger in 2007 to gain clout, could be near-term sources of spectrum for AT&T or T- Mobile, according to Cusick. T-Mobile and Sprint Nextel Corp. (S), the No. 3 carrier after Verizon Wireless and AT&T, could also be interested in combining with Dish, said Timothy Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York. Sprint also was in talks with partners to acquire Clearwire, people familiar with the matter said in August.

Scott Sloat, a Sprint spokesman, and Philipp Kornstaedt, a T-Mobile spokesman, declined to comment.

‘How Desperate’

Smaller carriers are targets because they have limited financing to expand themselves and they own spectrum that would help larger carriers’ network buildouts, said Chris King, an analyst with Stifel Nicolaus in Baltimore.

“It all boils down to how desperate Randall Stephenson is for spectrum,” King said in a phone interview. “He only has a few options. There’s Leap (LEAP) or MetroPCS, but those would face regulatory challenges, or there’s Dish with less of a challenge and clean spectrum.”

Facing opposition from U.S. regulators, AT&T ended its nine-month bid for T-Mobile on Dec. 19. AT&T said it was unwilling to continue an expensive fight against opponents who said the deal would concentrate too much power in the hands of AT&T and Verizon Wireless, the largest U.S. mobile carrier.

As part of the agreement, AT&T was forced to pay a $3 billion breakup fee and set aside a portion of 4G wireless spectrum to hand over to T-Mobile. While AT&T was struggling with the T-Mobile combination, Verizon Wireless, jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD), made $3.9 billion in deals last month to acquire unused spectrum from Comcast Corp., Time Warner Cable Inc. and Cox Communications Inc.

‘Outfoxed Them’

“Verizon outfoxed them during the T-Mobile process,” Mike Brell, a San Antonio-based money manager with Frost Investment Advisors LLC, said in a phone interview. “The balance of power has shifted to Verizon in the past few months. AT&T has to look at all the possibilities. They are at a competitive disadvantage now.” Brell helps manage $8 billion, including AT&T shares.

The cable deals leave Verizon Wireless with 56 percent more 4G spectrum than AT&T in the top 10 markets and 46 percent more in the top 100, according to John Hodulik, a UBS AG analyst in New York. AT&T, whose 100.7 million wireless subscribers trail Verizon Wireless’s 107.7 million, would have boosted its spectrum by 62 percent with the T-Mobile deal, according to UBS.

JPMorgan used $50 per Dish share as an “example” price when calculating how the takeover would impact AT&T in a Jan. 10 note, and estimated the deal would boost AT&T’s earnings even at $80 a share.

‘Top Dollar’

Using Dish’s 20-day trading average through last week, a $50 price would represent the highest premium paid by a telecommunications company in a deal greater than $5 billion since Telefonica SA offered a 91 percent premium for Endemol Entertainment Holding NV in 2000, Bloomberg data show.

“The question that comes down to AT&T is — will AT&T pay top dollar?” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual in New York, said in a telephone interview. “In terms of available spectrum, Dish has a very attractive portfolio. $50 is not cheap but reasonable.”

At $50 a share, Dish’s equity would be valued at $22.3 billion, and AT&T would have to assume its $4.9 billion in net debt, data compiled by Bloomberg show.

Dish’s spectrum will be worth about $9.4 billion if it wins approval from the Federal Communications Commission to convert airwaves gained in the DBSD and TerreStar deals into mobile- phone spectrum, according to Hodulik. Dish Chairman Charlie Ergen has said that the company is planning to start its own wireless service. Dish has said it expects FCC approval in March.

Better Options

The company paid a total of $2.8 billion for TerreStar and DBSD, according to JPMorgan’s Cusick.

AT&T has better options to expand and gain spectrum than buying Dish, Malcolm Polley, who oversees $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. Dish’s attractiveness is reduced by its satellite-TV service, which AT&T doesn’t need, he said.

“I don’t get the fit,” Polley said. “What does AT&T get if they bought Dish? Some spectrum. Beyond that, what does it bring to them? Not much. So you’re going to spend multiple billions of dollars to acquire a company that doesn’t give a whole lot other than some spectrum?”

He said an easier option for AT&T would be to acquire a regional wireless carrier, such as MetroPCS or Leap, which would directly bolster AT&T’s wireless unit. Short of a full takeover, AT&T and Dish could also do a deal for spectrum alone, Solaris Group’s Ghriskey said.

‘A Prime Opportunity’

Still, AT&T could use Dish’s television service to expand its own U-verse video product beyond its existing footprint, Walt Piecyk, an analyst with BTIG LLC in New York, said in a phone interview. AT&T could also sell or spin off Dish’s TV business, said Ghriskey, who oversees $2 billion.

The demand for spectrum combined with the intensifying competition in the wireless and TV industries mean this may be an opportune timing for Dish to find a buyer, King of Stifel Nicolaus said.

“Dish’s satellite-TV business isn’t going to be all that viable forever, and the plan to build a new national wireless network is somewhat delusional,” he said. “If Charlie Ergen was ever interested in selling, this would be a prime opportunity for it, and the value to AT&T certainly wouldn’t be higher than it is right now.”



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