Do Dish and T-Mobile Need Each Other?

Charlie Ergen - H 2015
AP Images

Charlie Ergen - H 2015

In what would directly impact Hollywood, this sort of consolidation means more bargaining power when licensing content.

Shares of Dish Network surged 5 percent on Thursday as investors applauded the notion that it could merge with T-Mobile U.S. and finally take full advantage of the estimated $60 billion in spectrum the satellite TV company has amassed over the years.

Analysts were mostly bullish at the prospect of a merger, which was first reported by The Wall Street Journal, citing people familiar with the early negotiations.

An obvious benefit is that the combined company’s bandwidth would get a significant boost so that its mobile users could more readily enjoy the massive amounts of video that can slow down traffic.

But observers also note a more direct impact on Hollywood, especially given that mergers of Charter Communications and Time Warner Cable and between AT&T and DirecTV are already on the table. This sort of consolidation means more bargaining power when licensing content.

“With three deals in the works and probably more on the way, the power is shifting from Hollywood to the telecom, satellite and cable operators,” said Shahid Khan of Meridian Advisory Group.

Khan says that Comcast, having abandoned its effort to acquire TWC in the face of regulatory scrutiny, could still roll up a couple of smaller players, and he added that Cablevision Systems, Cox Communications and Mediacom each are ripe acquisition targets.

“For the industry, this creates yet another major player,” Khan said. “We will see more consolidation in the pay TV industry.”

Until now, it wasn’t entirely clear what Dish CEO Charlie Ergen intended to do with all the spectrum he was acquiring. Indeed, he could have simply sold it off for a profit as companies like Comcast and Qualcomm have done, or he could have taken the massively expensive — and therefore unlikely — path of creating a mobile phone service from scratch.

Analysts, though, seem to like the idea of a merger with an established player, and T-Mobile, or perhaps Sprint, make the most sense. In fact, BTIG analyst Walter Piecyk noted on Thursday that Ergen has in the past praised T-Mobile and its CEO, John Legere, and that the admiration appears to be mutual. If the merger happens, Ergen would be chairman of the combined company while Legere would be CEO, according the Journal.

But while the merger makes sense, Piecyk notes that neither side is in “need” of the other.

“The growth of data will sustain the demand for Dish’s spectrum regardless of what happens to T-Mobile,” he said.

He also noted that T-Mobile already delivers the fastest wireless data speeds in the industry.

“T-Mobile is adding more post-paid smartphone subscribers than any of its competitors and is about to generate meaningful free cash flow,” Piecyk added.

Shares of T-Mobile rose 3 percent on Thursday to $39.34, giving it a market capitalization of $31.9 billion, while Dish’s $3.44 gain had it closing at $74.25 with a $34.4 billion market cap. When debt is added into the mix, the Journal says Dish would pay about $58 billion for T-Mobile.

If Dish and T-Mobile come to terms quickly, the timing can be fortuitous for the satellite TV entity, given that it is itching to become a fast-growth company again after ending 2014 with about 80,000 fewer video subscribers than it had begun the year with. Dish, though, added 141,000 broadband subscribers in 2014, but that only brought its entire base there to 577,000. T-Mobile, on the other hand, has 57 million customers, 28 million post-paid subscribers and operates the fourth-largest wireless network in the country.

To be a true competitor, Dish needs a significant bundled product that would include a fast, nationwide voice and data network, broadband for home and mobile devices, television and even its Sling TV online service, all of which is possible with a merger, though several observers noted on Thursday that a marriage with T-Mobile is far from a done deal. Ergen, after all, has in the past threatened to merge his company with DirecTV, Sprint, Clearwire, MetroPCS (acquired by T-Mobile two years ago) and others, though none of those deals came to fruition.

“The companies are talking and they agreed upon management roles. That doesn’t sound like anything is happening imminently,” Piecyk said. “There is little near-term pressure on either company to sell.”