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Sprint/TMO talks back on, and Dish could be the beneficiary

The on-off merger talks between T-Mobile USA and Sprint are reportedly back on, and sources say a deal could be made by the end of October. As usual, Dish Network is being factored into Wall Street’s speculation about the latest round of telecoms and media consolidation in the US.

Last Tuesday, shares in both MNOs leapt on reports by CNBC that their respective parent companies – Deutsche Telekom of Germany and Softbank of Japan – were in “active talks”. And according to analysts at Barclays, that could open the door for satellite TV operator Dish to enter the wireless market in earnest at last.

The company, which has acquired substantial spectrum assets, has committed to an NB-IoT roll-out, largely to satisfy FCC build-out requirements for some of its airwaves, but otherwise its wireless intentions have remained shadowy. Some watchers believe it acquired its spectrum mainly as a tradeable asset, but Dish itself has said it will roll out a network (it is now referring to NB-IoT as ‘5G’), but that it needs an infrastructure partner to make the economics work. Attempts to acquire Sprint failed when it was gazumped by Softbank.

Its path might be smoothed by a Sprint-TMO merger, according to Kannan Venkateshwar of Barclays in a note to investors, because the Department of Justice would demand significant concessions to green-light a deal which would reduce the number of MNOs in the US market. “As we have highlighted in the past, given past concerns at the Department of Justice around a three-player telecom market, the approval of such a deal should not be taken for granted,” he wrote. “While political realities may make the path easier today than would have been the case last year, we believe this is likely to need the combination to offer significant concessions.”

He speculates that Dish might raise legal challenges to the merger plan and press for concessions which helped its own case. Barclays thinks TMO and Sprint “would need to address competitive concerns either by making available competitive MVNO arrangements to new players who want to enter the industry and/or providing at least some of Sprint’s excess spectrum.”

They added: “With Dish now owning critical component pieces of spectrum required to run a network, an ability to leverage the combined network of Sprint/T-Mobile could offer Dish the ability to enter the wireless business without having to invest in infrastructure…. Dish could then essentially launch its own service or lease this network on a wholesale basis to any third party that wants to enter wireless.”

According to the new reports, the deal under discussion would make Deutsche Telekom the largest shareholder in the combined entity. DT once wanted to exit the US market, after merging TMO with MetroPCS to form a publicly listed company, but now has a strong growth engine on its hands driven by TMO’s impactful Uncarrier strategies. The deal would be a stock-for-stock one, said CNBC, citing unnamed sources “familiar with the negotiations”.

If that all comes to pass, it would leave US cable in the position that we described last year – with all potential cellular operations too expensive for a single operator to buy into, and Comcast and Charter, with perhaps Altice’s help, would be forced to look at the suggestion we have made, that all of them collectively buy Verizon and then cash out its fixed line assets, and keep its cellular business. A Sprint T-Mobile deal is likely to depress the Verizon stock sufficiently to make this a possibility.

Other US developments could benefit Dish, according to Walter Piecyk of BTIG Research. For instance, AT&T is deploying a 10 MHz block of 700 MHz spectrum in New York and other markets, to supplement its PCS and WCS bands. Piecyk notes in a blog post that AT&T is using two adjacent 6 MHz blocks of 700 MHz Band D and E spectrum, and that it owns those blocks in markets which cover 25% of the population and some of the nation’s biggest cities. However, in the remaining 75%, it owns only one 6 MHz block, and Dish owns the other one in almost all the markets. That sets the stage for a spectrum swap, which, Piecyk argues, “could be an opportunity for Dish to sell or swap its Band 29 spectrum with AT&T.

We value Dish’s Band 29 spectrum at $969m, after tax. Dish’s Band 29 spectrum has unique value to AT&T, which can combine it with its Band 29 spectrum for immediate use. Band 29 has been in iPhones since 2014, so the immediate benefit to AT&T is even greater than Band 66. Therefore, AT&T could clearly assign a higher value than $.85 per MHz/POP to this spectrum.”

In return for Dish’s Band 29 airwaves, AT&T could offer the 600 MHz spectrum it bought earlier this year, since it has more sub-1 GHz spectrum than any other US carrier and could be willing to trade that for airwaves which support additional capacity.

“The spectrum AT&T just won in the broadcast incentive auction has similar value to Dish’s Band 29 spectrum. In addition, it’s unclear if AT&T actually wanted to buy that spectrum given the low activity in later rounds of the incentive auction,” Piecyk wrote. “All 23 licences that AT&T acquired are in markets where Dish also acquired licenses, so a combination would provide increased spectrum density in a number of markets including San Francisco, Philadelphia, Washington DC and Dallas.”

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