Dish Stock Shows Ergen’s Mobile Network Seen as Bluff

Ergen’s moves are being watched by investors because of the effect on the U.S. communications industry. If he decides to build a new national network with spectrum licenses he’s buying, Dish would create more competition for a wireless industry dominated by Verizon Wireless and AT&T Inc. If he instead sells the airwaves, he may enhance the power of the top players by giving them more capacity to add customers and services.

Dish’s rising share price is evidence that investors think Ergen won’t commit Dish to the cost, time and regulatory hurdles of building a network, said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York, who rates the stock “market perform.” Dish, the second-largest U.S. satellite TV provider, has increased about 27 percent in the past 12 months.

“If Dish came forward and confirmed tomorrow they’re about to start doing something strategically grand — building a wireless network — the stock would plummet,” Moffett said.

Ergen is buying about $3 billion in airwaves that the government has designated for sending data from satellites and has said he wants to instead use that spectrum to transmit between ground-based towers — a potentially more profitable business model. While the Federal Communications Commission approved Dish’s purchase on March 2, the agency said the company wouldn’t be immediately allowed to repurpose the spectrum.

‘Lots of Options’

The FCC said it would rather take the time to rewrite rules governing the spectrum first, a process that may take a year, said Bryan Kraft, an Evercore Partners Inc. analyst in New York. Spending billions of dollars on a wireless network would hurt share buybacks and the value of the company, Moffett said.

Tom Eagan, an analyst at Collins Stewart LLC in New York, estimated that a national wireless build-out would cost $6 billion, a far cry from the $250 million cost for satellites.

Ergen said during Dish’s fourth-quarter conference call on Feb. 23 that if the FCC delayed his plans, he’d consider “all alternatives” for the future of the company and the spectrum, which is being acquired from DBSD North America Inc. and TerreStar Networks Inc. in deals totaling $3 billion. The shares jumped as much as 4.6 percent the day of Ergen’s comments.

“He has an asset that he will figure out how to monetize,” said Marci Ryvicker, a Wells Fargo & Co. analyst in New York, who has an “outperform” stock rating. “Dish has a lot of options — partnering, selling the spectrum, selling the company — I wouldn’t hold Charlie Ergen to anything specific.”

Negotiating Tactic

Dish had asked the FCC for waivers to let it offer service with handsets that use ground-based signals only and don’t communicate directly with satellites, an exemption to rules governing those airwaves. The waiver would have raised the value of the airwaves beyond the prices being paid by Dish, Eagan said.

“It serves him right to say he’s willing to build a network even if he’s not,” said Paul Sweeney, a media and Internet analyst with Bloomberg Industries. “It’s a negotiating tactic. He’s saying he’s willing and able to build the network to provide maximum value for the spectrum.”

The FCC said Dish must wait as the agency writes new rules so the airwaves are permanently approved for high-traffic ground-based networks in a way that will “maximize the long- term value of the spectrum for the American economy,” according to an e-mailed statement from Neil Grace, an FCC spokesman.

Going It Alone

“Since Dish hasn’t planned to begin investing capital into a wireless network now, the FCC didn’t have a compelling reason to grant a waiver, which could be viewed as providing a windfall to Dish,” James Ratcliffe, a Barclays Capital Inc. analyst in New York, said in a note to clients.

Dish is “disappointed” because the FCC’s decision delays introduction of “new mobile broadband competition” Aaron Johnson, a spokesman for the Englewood, Colorado-based company, said in a statement last week. He didn’t elaborate on the network plans other than to say Dish would complete the DBSD and TerreStar airwaves acquisitions as soon as possible. A separate company spokesman, Marc Lumpkin, declined to comment further yesterday.

“Obviously we are prepared to go it alone in the business,” Ergen told investors on the conference call before the FCC’s decision. “We begged people to build satellites for us, and nobody would, so we had to do it ourselves.”

Chances of Acquisition

Dish rose 0.5 percent to $29.54 at the 4 p.m. close of New York trading. In the past 12 months, Dish has outpaced DirecTV (DTV)’s 0.2 percent gain and a 2.5 percent jump in the Standard & Poor’s 500 Index. (SPX)

While Dish’s net income rose 54 percent in 2011 to $1.52 billion, the company’s net customers fell by 166,000 while DirecTV’s gained 662,000 U.S. subscribers. Dish’s future can’t be as a standalone satellite-TV company, Ergen said on the call. “No customer wants just fixed video,” he said.

Finding a way to offer a fast Internet connection bundled with satellite TV is essential for Dish to compete against cable and telecommunications companies, said Michael McCormack, an analyst at Nomura Securities Inc. in New York, who has a “neutral” rating on Dish shares.

McCormack dismissed speculation that Dish is an acquisition target for AT&T. (T) Alpine Mutual Funds, a Purchase, New York-based investment firm, said Dish could be valued as high as $50 a share in a takeover. That would be a $22.4 billion price tag, a risk AT&T probably wouldn’t take after losing its effort to get antitrust approval for a purchase of T-Mobile USA, McCormack said.

Big Bluff

Dish has begun offering broadband satellite bundled with video service through a partnership with Carlsbad, California- based ViaSat Inc. (VSAT), giving customers speeds of as much as 12 megabits per second. Those speeds are “a great alternative” for the millions of Americans that live in rural areas, said Dish Chief Executive Officer Joseph Clayton, “but it’s not going to be as good as fiber to the curb.”

The company would prefer to pair its spectrum with a company that has an existing national wireless network, Clayton said in a December interview.

“Economically, building out a network doesn’t make sense,” McCormack said.

If Ergen is truly playing poker with his words, following through on his public statements and actually building a network might be his biggest surprise, Moffett said.

“I’m in the minority,” Moffett said. “Everyone thinks he’s bluffing. I’m not so sure.”


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