Cramer: T-Mobile + Dish = The perfect marriage.
Sprint was thrown another curveball Thursday in charting its future — a potential merger between rival wireless carrier T-Mobile US and satellite television provider Dish Network.Dish Chief Executive Officer Charlie Ergen has spoken with T-Mobile’s controlling shareholder Deutsche Telekom AG about a deal for years, and renewed those discussions last September, people with knowledge of the matter said at the time.
A combination of satellite-TV provider Dish Network Corp. and T-Mobile US Inc. would probably be viewed favorably by Washington regulators if the companies decide to merge. The Wall Street Journal reported talks between Dish, the country’s second-largest satellite TV operator, and T-Mobile, the fourth-largest wireless carrier, without identifying its sources. But it is a limited resource, which puts it in high demand, particularly among wireless carriers who must respond to ever-rising data use on mobile phones in the United States. 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. Different types of spectrum — ranging in frequency from low to high — are suited to different uses; the type that carries mobile phone communications most reliably, known as low-frequency spectrum, can travel far and through buildings and trees.
Both sides are still far apart on price and may not reach an agreement, said one of the people. “You bring together two industry mavericks, and that will in general be viewed positively by antitrust and other officials,” Gene Kimmelman, a former Justice Department official and president of the policy group Public Knowledge, said in an interview. 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.
In the wireless industry, three-quarters of low-frequency spectrum is in the hands of AT&T and Verizon, giving those companies a major competitive advantage and leaving T-Mobile, Sprint and other smaller phone carriers struggling to deliver reliable service and expand their networks. Ergen has said he’s interested in T-Mobile, which has a market value of about $32 billion, describing it in February as a “company we think highly of.” A purchase of T-Mobile would give Ergen a national wireless network over which it could deliver mobile video to challenge the pay-TV industry. Regulators have touted T-Mobile as an upstart that injects needed competition into the mobile business, which is dominated by AT&T Inc. and Verizon Communications Inc.
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. T-Mobile is the most aggressive carrier out there, with the fastest growth, but it needs the spectrum. “John Legere is a rebel with a cause, aspiring to have the best phone company on Earth. Recognizing that, the federal government is seeking to redistribute low-frequency spectrum from local TV stations — who claimed significant swaths of that desirable spectrum in the days before cellphones existed — to wireless phone carriers.
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. The Federal Communications Commission is planning to buy spectrum from TV stations and auction it off to phone carriers, a complicated exchange that is expected early next year. With Dish and T-Mobile operating in different industries, the combination is unlikely to raise competition worries for the Justice Department, said Morris Bloom, an antitrust lawyer at Axinn Veltrop & Harkrider LLP in Washington.
The government may look at the deal as pro-competitive, according to Bloom, because it could create a stronger competitor to cable TV companies like Comcast Corp. and mobile carriers like Verizon. Cramer saw signs that a merger might be imminent when cellphone tower stocks like American Tower, SBA Communications and Crown Castle all rallied higher as well. Chairman Masayoshi Son to buy T-Mobile, on skepticism that potential benefits would be worth allowing the number of nationwide carriers to shrink below four. In fact, BTIG analyst Walter Piecyk noted Thursday that Ergen has in the past praised T-Mobile and its CEO, John Legere, and that the admiration appears to be mutual. These stocks have all underperformed lately, but if you take into consideration the merger you can see that these two companies will need all the tower space they can get in order to do a nationwide build out. “In the end, I think what the market is saying with these moves is that there is an inevitability to the talks that makes them undeniable,” Cramer added.
Dish Network has amassed a large amount of spectrum in recent years, to the puzzlement of many in the industry, with analysts left wondering what the satellite provider’s plan for that resource was. “T-Mobile is holding on by a thread,” said Ellen Satterwhite, a former F.C.C. employee and director of Glen Echo Group, a strategic communications firm focused on technology and telecommunications issues. “And if the F.C.C. isn’t going to make enough low-band spectrum available, I can see the agency offering approval of this merger as a chew toy to advocates for competition.” “It doesn’t stand to reason for me that a T-Mobile-Dish merger would mean immediate competition,” Ms. For starters, Dish could help T-Mobile offer a strong video portfolio — sports, entertainment and other programming — as they combine forces to battle Sprint for wireless subscribers. If the merger happens, Ergen would be chairman of the combined company while Legere would be CEO, according the Journal. “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.
The important thing to note is that when investors see two stocks go up on takeover talks and then stay aloft afterward, this indicates to Cramer that the smoke will ultimately lead to fire. 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. Craig Moffett, senior analyst and partner at MoffettNathanson Research, called low-frequency spectrum critically important for offering service in rural areas. These airwaves providing network capacity would put Dish in a favorable position, compared with other carriers, to deliver high-speed data and video to subscribers’ phones and tablets, Butler wrote.
A merger would further help Dish because it doesn’t own a wireless network but has about $50 billion worth of wireless airwaves licenses networks need to operate. And in a world in which phones are regularly used for Internet access, the ability to transport more information over shorter distances might prove increasingly important. “There’s a legitimate debate now over what’s most valuable,” Mr. 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. Sprint’s owner, Tokyo-based SoftBank, publicly pitched a merger with T-Mobile last year but dropped those plans as federal regulators made their disapproval clear.
The hope was that a combination of the two smaller wireless carriers would create one with almost the same number of wireless subscribers as the two big players, Verizon and AT&T. Instead of pressing its merger plans, SoftBank deferred them, and Fritzsche said many believe Sprint would renew its pursuit once the Obama administration left office in 2017.
The talks reported by the Journal would be between Ergen, Dish’s largest shareholder, and Deutsche Telekom, the German company that owns about two thirds of T-Mobile US. This reported deal could trigger more bidding. “If the article proves to be correct and the companies really are in serious talks, we suspect it will flush out competing bidders, perhaps for both T-Mobile and Dish,” Jonathan Chaplin, an analyst at New Street Research, said in a note to clients.