Sprint Nextel Corporation (NYSE:S) has received a merger proposal from DISH Network Corp. (NASDAQ:DISH). DISH sent a letter to the board of Sprint Nextel Corporation (NYSE:S) offering $7/share for Sprint including $4.76 in cash plus 0.05953 DISH shares, which would have Sprint shareholders owning 32% of the pro forma company. Dish would look to have Sprint’s Clearwire Corporation (NASDAQ:CLWR) deal close. The resulting company would have an estimated $40 billion in net debt on ~$10.5 billion in 2014 EBITDA pre-synergies, but also a great spectrum position (14 MHz of 800, ~75 MHz of 2.0 GHz and ~150 MHz of 2.5 GHz spectrum as well as Dish’s 700 MHz E-Block plus an almost certain lock on the 10 MHz H-Block). Analysts at JPMorgan Chase & Co. (NYSE:JPM) believe that Dish is looking to create a high capacity fixed and mobile broadband network for customers that will offer video and data seamlessly in home and out. Dish estimates $37 billion (~$5/share) in synergies including $1.8 billion in annual cost savings by the third year.
JPMorgan Chase & Co. (NYSE:JPM) believes that for Sprint Nextel Corporation (NYSE:S) this bid seems more attractive than Softbank Corp (PINK:SFTBF) offer. For Sprint shareholders the DISH Network Corp. (NASDAQ:DISH) bid offers a larger cash portion ($4.76 vs the estimated $4.01 from Softbank) as well as a larger share in the combined entity (32% vs 30%).
Many analysts are saying that they would not expect much from near-term cost synergies (which is a BAD sign) the long-term revenue synergies of a new broadband/video offer for consumers could be of significant value. The risk seems to be that there would be a lot of leverage on the combined company – nearly 4x 2014 EBITDA – but JPMorgan Chase & Co. (NYSE:JPM) believes business prospects and cash generation potential of the combined company look solid. The next question is the response from the Sprint board and whether Softbank Corp (PINK:SFTBF) comes back with another bid, potentially using its balance sheet advantage with more cash.
For DISH Network Corp. (NASDAQ:DISH) – This deal would open a new business path. This would be a transformative deal for Dish, opening up the broadband business that Chairman Ergen has discussed many times. JPM believes that Dish is looking to create a high capacity fixed and mobile broadband network for customers that will offer video and data seamlessly in home and out. When combined with Dish’s satellite video offer and Sprint Nextel Corporation (NYSE:S)’s mobile voice network this could create a very compelling competitor to AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) as well as cable companies long term. While the first reaction by Dish investors could be negative, JPMorgan Chase & Co. (NYSE:JPM) believes the company is much more interesting long term with this combination.
Other derivative impacts.
- Clearwire – with Dish out as a bidder shares could have a harder time holding the $3.30 level. Additionally Dish may be a substantial holder of Clearwire Corporation (NASDAQ:CLWR)’s debt, so could exercise more influence than Sprint if the company were to go into bankruptcy.
- Positive for towers. This very likely cements a four player wireless market for at least the next few years.
- DTV impact. A merger with DirecTV, which has been extensively discussed in the press (Businessweek.com April 10), could be more likely long term if Dish has a broadband path. That said, this deal would likely have to wait at least 1-2 years until the Sprint-Dish merger were complete.
- Incumbent video and broadband players – negative. This could create a much more credible competitor to AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) in the mobile space, as well as to fixed broadband providers like telcos and cable companies.
How will DISH Network Corp. (NASDAQ:DISH) finance the Sprint Nextel transaction is the million dollar question. Nomura believes that DISH would use $8.2bn of its $10bn cash on hand as well as other sources of financing to fund the $17.3bn cash portion of the offer.
Nomura: A Key Concern for the DISH Bid Is Leverage
While the DISH Network Corp. (NASDAQ:DISH) bid provides more cash for current Sprint Nextel Corporation (NYSE:S) shareholders, it also comes with higher risks. DISH estimates pro forma net leverage would be 4.7x, inclusive of the $2.97/share offer for Clearwire; this is well above the ~3x they expect for the Sprint Nextel/Softbank Corp (PINK:SFTBF)/Clearwire Corporation (NASDAQ:CLWR) transaction.
With Sprint Nextel Corporation (NYSE:S) needing to raise capital as for its Network Vision program, and positive free cash flow some years away, it is unclear if a 4.7x leverage profile is proper for a company in this position.
If DISH Spectrum Becomes Operating, DBS Business Is Expensive A key component of DISH Network Corp. (NASDAQ:DISH)’s current valuation is wireless spectrum; Nomura estimates DISH shares trade on 4.7x 2013 adj. EV/EBITDA, giving $6.7bn of value to its owned spectrum. In a combination with Sprint Nextel Corporation (NYSE:S), they would cease assigning asset value to the spectrum as it becomes an operating business. DISH currently trades at 7x EV/EBITDA on the satellite TV business alone, similar to the Comcast multiple and a premium to Time Warner Cable, which they believe is inappropriate given the inferior longterm prospects of a single-product pay TV provider.