Credit Suisse’s Telco team is making a huge call on Dish Network (NASDAQ:DISH) saying At&T (T) could be looking to buy the company for $39/share (+70%) to gain access to spectrum assets.
Spectrum Assets, EPS Accretion & $4-7b in Synergies: The Argument Is Compelling
Ergen On the Verge . . .
Charlie Ergen could be on the verge of adding great value to his empire of media and telecommunications assets. If Ergen is a) able to get control of both DBSD and TerreStar, and b) the FCC relaxes MSS spectrum regulations, then:
– DISH will have paid ~$1.1BN for an asset that CSFB values at $3-$5bn
– Ergen could combine the DBSD spectrum (20 MHz of MSS spectrum) with the 20 MHz of MSS spectrum that SATS is attempting to acquire via the TerreStar transaction, creating an extremely valuable tranche of contiguous spectrum (40 MHz). This is clearly a case where “the whole is greater than the sum of its parts.”
– Credit Suisse believes that AT&T has bid for DISH’s DBS assets in the past. If Ergen is able to pair his spectrum assets with his DBS business of 14mm subs, AT&T might find Ergen’s creation to be an enticing combination.
Will AT&T Get Back in The Game of Bidding for DISH? It’s Certainly Possible
If things play out the way Ergen hopes, DISH could once again become an appealing asset to AT&T, for three reasons:
1) AT&T needs earnings growth. Purchasing DISH would be accretive and would accelerate EPS growth;
While not stunningly accretive, a purchase of DISH might be attractive for AT&T, given that the company guided to relatively lackluster EPS growth of 5% for 2011, and gave investors little reason to believe EPS growth would accelerate in 2012 or beyond. AT&T’s most ardent EPS growth has come on the heels of big M&A deals – EPS growth has averaged 2% over the last decade; however it landed at 25% in the wake of the AWE / Cingular deal, 28% in the wake of the SBC / BellSouth deal, and 22% in the wake of the SBC / AT&T deal. Not surprisingly, these were also the best periods for stock price appreciation.
Excluding integration costs, Credit Suisse estimates that a stock for stock deal, whereby AT&T acquired DISH at ~$39 per DISH share, would be 1.5% accretive in year 1 (assuming 12/31/12 close) and 4% by year 3. Including integration costs, the deal is EPS breakeven in year 2 and 3% accretive by year 3 . Firm assumes that a deal for the SATS spectrum could be done in cash.
2) AT&T sees strategic value in DBS assets. Randall Stephenson has noted in the past that combining a DBS asset with AT&T would build value through synergies, reaching $16b in his estimation.
3) AT&T would get two pieces of valuable spectrum – 40MHz of MSS spectrum, and 6MHz of 700MHz spectrum that is a perfect compliment to the spectrum the company just purchased from QCOM.
Deal Terms & Structure: Getting to Yes
DISH apparently walked away from a $55 offer from AT&T in 2007-08. This would have valued Ergen’s personal stake in the business at ~$13.5b. Some had speculated that Ergen was looking for as much as $65/share, which would have valued his stake at close to $16b. Credit Suisse thinks it would be very difficult for AT&T to offer Ergen anything close to $16b for his stakes in DISH and SATS today.
Having said that, the firm believes that T could afford to offer Ergen something every attractive. In fact, they estimate that AT&T could offer Ergen a premium to the current value of his stakes in DISH and SATS, of ~70%.
Why now?
Credit Suisse notes that when they last met with senior mgmt at AT&T they told us they did not see any large deals in the US on the horizon – the regulatory environment simply wasn’t conducive. What has changed:
1) The big issue then was net neutrality – this has been resolved, at least to AT&T’s satisfaction.
2) The CMCSA / NBCU has been approved with conditions that Comcast can appear to live with.
3) The composition of congress has changed and the administration appears to be shifting to the center.
4) Most importantly, DISH now has an asset that AT&T really wants (20 MHz of MSS spectrum), in addition to the DBS business.
Notablecalls: I suspect this is a very significant & timely call by CSFB’s team:
– AT&T needs the spectrum and they certainly need the growth. Remember this is a $190 bln company, which means they have the ammo to buy DISH & SATS.
Remember, AT&T has offered $55/sh for DISH in the past.
– TerreStar has a confirmation hearing on March 4 for approval of a reorganization plan in which control may go to EchoStar where Ergen is chairman. That may serve as the catalyst.
– Every fund manager in the Universe is looking for upside opportunities like this one where you can get 70%+ upside with relatively limited downside.
They will read the 18-page call from Credit Suisse today, close their eyes and just buy, buy & buy.
I suspect DISH will trade higher today toward $23-24 levels. Goes higher from there in the coming weeks.
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DISH has more assets to offer than in 2008. For this reason it seems hard to believe Ergen wants to sell for less than the previous offer. I think he would hold out a few years for a turn in the economy or hold out for a better offer.