T-Mobile / Sprint / DISH: What To Look Out For In A Remedy Package

According to press reports (LINK), the parties are nearing a deal in which DISH would acquire $6BN in assets from the merging companies (mostly spectrum & prepaid subs).  Presumably, the asset acquisition helps establish DISH as a credible enough fourth carrier such that the DOJ can approve the deal.  The state AG’s will then decide whether the divestitures and other conditions are sufficient to cure the competitive harms that they see arising from the deal.  If the concessions are along the lines we discuss below, we think the concessions could weaken the state’s case enough such that they drop their suit or lose in court, but it will depend on the details of the concessions.

Necessary Concessions

We think a deal must include the following to be credible:

1. Subs: Boost at a minimum and perhaps more.  10-12MM subs would be better than 7MM.
2. Spectrum: Ergen doesn’t need more, but if they can get some, why not.  We would push for 2.5GHz rather than 800MHz mentioned in press reports.
3. MVNO: DISH will need an MVNO to support the Boost subs for at least as long as it will take them to build out a network.  The wholesale rate should be low enough such that Boost can make money.
4. Network deployment commitment.  We would imagine that DISH gets a pass on their current buildout deadline, but they have to commit to deploying their own network within a certain timeframe (five years?).  It might make sense to have the term of the MVNO coincide with the buildout deadline (perhaps with a roaming deal for areas not covered by DISH by then).  The terms of the build-out would no doubt be spelled out more clearly than those in the AWS-4 licenses.

The best outcome for DISH would be an agreement whereby T-Mobile deploys DISH’s spectrum on their towers while they are in the process of deploying their own spectrum and integrating networks.  This would significantly cut the capex required for DISH to deploy its spectrum and it could result in lower ongoing networks costs too (assuming DISH & TMUS share passive infrastructure).  A spectrum deployment agreement would give the agencies and the state AGs greater assurance that DISH would meet their buildout obligations this time around.   It’s unclear whether the DOJ would ask for this, or whether T-Mobile would be willing to grant it (probably not), but it would be great for DISH if they did.

Implications for the DOJ and States

The terms outlined above should satisfy the four requirements set out by the DOJ in the AT&T case (with a little generosity of interpretation, perhaps):

1. Nationwide spectrum: DISH already has close to 100MHz of nationwide spectrum, and the deal could get them more still.  They would have roughly what Verizon has today (excluding millimeter wave), and what T-Mobile has before acquiring Sprint.  There is little doubt that this is sufficient to support a credible competitor…once it is deployed.
2. Nationwide network: this is the only questionable piece.  Based on the terms outlined above, DISH would have access to a nationwide network and an obligation to build their own in a specific period of time.  We think that should be sufficient to meet the DOJ’s requirement, but it depends on how enforceable the network deployment requirement is, or perhaps on how strongly motivated DISH would be to pursue it.  It will be interesting to see what DISH is willing to commit to; Ergen likes options and hates limits.
3. Tens of millions of subscribers: checkish.
4. A brand and other attributes: check.

If there is a fight over the conditions, it will primarily be over whether the network requirement is met by the terms of the deal.

Thesis Impact – T-Mobile

The deal is good.  Many clients have asked why T-Mobile would take a deal that enables a new entrant like DISH, or Cable.  We don’t think they would.  But we don’t think concessions in this deal will enable either DISH of cable, per se.

DISH was threatening to launch a wireless business long before this deal was conceived.  If they launch, it will be because they meant the threat (there is some doubt), and they managed to find the capital to build it.  There is nothing they get from this deal that would materially change the magnitude of the threat, though it could accelerate it a little.  If DISH isn’t coming, then T-Mobile should acquire Sprint and book $43BN in synergies in a three carrier market.  If DISH is coming, then they ought to acquire Sprint and face off the threat of new competition with 3x the spectrum and 2x the scale.

The same is true of Cable; if cable received the benefit of concessions, it wouldn’t materially change the magnitude of the Cable threat.  If we are correct, then the deal is good for T-Mobile regardless of what DISH or Cable does.  Or to be more precise, we don’t think there are concessions that T-Mobile would agree to that would be worse for them than the status quo.  The status quo is quite good for T-Mobile.

Thesis Impact – Sprint

It should be good (but maybe not).  If the deal is approved Sprint has the most to gain, but there is a risk.  Their deal could be renegotiated.  If concessions exceed $7BN in value, T-Mobile could demand a lower exchange ratio.  They have the right to walk way.  We doubt Sprint would take a threat to walk away too seriously, but Sprint also needs the deal more than anyone does.

Thesis Impact – DISH

The deal is good.  We don’t think wireless subs or spectrum materially improve their prospects.  They will likely be able to secure both at very good prices (a good deal is good).  The cash flow from the Boost business could help support their leverage and extend their options.  And more spectrum is always good for ones own benefit and because is keeps it out of the hand of someone else (who may therefore need to be a customer).  These things are all good, but slightly so.

The biggest benefit would come from getting the FCC off their back (we wrote about this in more detail in our weekly comment LINK).  If DISH’s stock price reflects some probability of the spectrum value being realized and some probability of the spectrum being snatched by the FCC, if the later is eliminated by this deal, DISH’s expected value goes up.  Their ability to find a partner and raise capital goes up too.

Thesis Impact – Cable

We don’t think they will get anything from the deal.  There is a chance they will get a better MVNO (lower rate; SIM control).  There is a much smaller chance that Charter could pick up some spectrum.  If they are not buying nationwide spectrum that would establish cable as the fourth competitor, we don’t see why the wireless companies would offer them anything or why the DOJ would require them to.  Altice, may be the one exception – they may be able to strengthen the MVNO deal they got from the FCC.

We think getting nothing is good for the cable stocks, at lest in the near term.  Investors will be relieved that they didn’t buy Boost or other assets.  After Comcast’s strong disavowal of any interest in assets we don’t think investors are terribly worried, but after a difficult 2018, they can’t help but be a little worried.  Press reports have implicated Charter and Altice in talks as recently as the weekend.

Thesis Impact – Verizon & AT&T

It is bad.  We think T-Mobile will use 200MHz of new spectrum to go after another 10 points of market share.  Good luck with market repair – we may see that once T-Mobile has had its fill of Verizon and AT&T subs, and they stand to capture more of the benefit from rising prices (if market prices are going up, it is better for the guy who has 40% of the market than the guy who has 30%).

We think it’s bad regardless of the concessions, but concessions are only likely to make it worse.  Or to be more precise, the concessions can only make the market more worried about new entrants and less likely to believe in market repair.  Verizon has had a nice run, in part because investors believed we would either get market repair or a damaged an ever-shrinking Sprint to feed off; they may have to concede some of their recently expanded multiple.