Dish Bids for Sprint But Needs Dose of Reality

by Jonathan Berr | April 17, 2013 9:57 am

Billionaire Charlie Ergen, who used to make a living counting cards at the blackjack table, just might be taking his biggest gamble yet.

The Dish Network (NASDAQ:DISH[1]) CEO has made an unsolicited $25.5 billion offer for Sprint (NYSE:S[2]), trumping an earlier $20.1 billion bid Japan’s SoftBank made for a 70% stake in the third-largest U.S. wireless company.

In theory, the deal makes quite a bit of sense.

Dish Network, the second-largest satellite provider, could gain an edge over rivals like Comcast (NASDAQ:CMCSA[3]) by being able to offer a bundle of mobile phone, high-speed Internet and television services. Customers would be able to stream live television over their phones without worrying about mobile data caps.

As The Wall Street Journal put it:

“There is a large percentage of Americans — as much as a third, Mr. Ergen estimated — who in the future will find it more efficient to get their home Internet over a wireless connection than through a wired one because they don’t have access to a superfast fiber-optic link.”

Plus, the cherry on top for Dish Network is the spectrum that would come from the Clearwire acquisition tucked into the deal.

Still, we must remember that theories are theories … and that the reality Ergen may face could be quite different than the optimistic scenario being laid out in the financial press.

Ergen is pressing to bundle services just as his business model has come under attack like never before. Cablevision (NYSE:CVC[4]) recently filed a suit against Viacom (NASDAQ:VIAB[5]) over its practice of making television providers carry less popular channels in order to carry more popular ones, to start.

Plus, developments like Aereo — an upstart company providing a service that allows users to stream broadcast television shows — could be ahother huge chink in the armor of media conglomerates.

In the end, television networks as we know them simply may not exist in five or 10 years.

Additionally, the other flaw in Ergen’s plan — and it’s a big one — is that he’s buying Sprint. Sprint continues to pay the price of its disastrous 2005 acquisition of Nextel, which caused it to take a $29.5 billion write-down in 2008 — one of the largest  in the history of corporate America. Plus, more than 7 million customers dropped Sprint because of the difficulty the company had integrating the Nextel acquisition.

Sure, Sprint’s prognosis isn’t entirely dire. The company has improved its customer service and has managed to sell its share of Apple (NASDAQ:AAPL[6]) iPhones. Heck, Jim Cramer has even become a fan.

But Sprint has still lost money for six straight years and probably will do it again for a seventh (and eighth) given the huge amounts of money its spending on subsidizing smartphone purchases — like those iPhones — and on upgrading its network.

Even its recent smaller-than-expected quarterly loss of $1.4 billion came with the fine print of 243,000 lost monthly contract customers. That was worse than analysts expected and came as rivals saw gains.

In fact, Sprint remains mired in third place in the wireless market, lagging both AT&T (NYSE:T[7]) and Verizon (NYSE:VZ[8]) … and the race isn’t even close.As of the latest quarter, AT&T had 105 million customers, Verizon had about 98 million and Sprint’s total was about 55 million.  In fact, Sprint would be in even worse shape had it not been able to help derail AT&T’s acquisition of T-Mobile.

Oh … and as of the end of 2012, Sprint had more $16 billion in net debt. That sure isn’t a pretty picture.

To further complicate matters, Verizon has reportedly offered to buy spectrum controlled by Clearwire for $1.5 billion. Sprint had agreed last year to buy the parts of Clearwire that it didn’t already own for $2.1 billion.

Without Clearwire’s wireless spectrum, Sprint’s expansion plans become extremely difficult. Clearwire is so attractive, in fact, that some commentators say it is the main motivation for Dish Network’s unsolicited bid for Sprint … but that reality also underscores Sprint’s weaknesses.

All in all, there might be some great ideas behind Ergen’s bid for Sprint, but really it’s nothing more than a bid for a floundering company. Investors should steer clear of Sprint, despite the bids flying its way.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned stocks.  Follow him on Twitter @jdberr.

Source URL: https://investorplace.com/2013/04/dish-bids-for-sprint-but-needs-dose-of-reality/

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