When T-Mobile US Inc. was trying to buy Sprint Corp., Colorado billionaire Charlie Ergen became the deal’s saving grace. Ergen had big plans to build a 5G wireless business, and U.S. antitrust authorities looked to that as the competitive antidote to allowing the industry’s two biggest discount carriers to merge. Sprint would be gone, but Ergen’s de novo network would take its spot. It was a regulatory rubber stamp for the ages.
Next, Ergen would just need $10 billion and a willing partner. No one figured a pandemic would shut down the economy and roil financial markets.
Pandemic or not, the U.S. Justice Department’s thinking at the time and the remedy it devised for the Sprint deal — which was also backed by the Federal Communications Commission — had flaws that were bound to come to light. Perhaps no one expected that to happen so soon, though: T-Mobile’s takeover of Sprint won final approval in February, defeating a group of states that sued to block it, and the deal was completed on April 1. Barely three weeks later, with the country in a recession amid an unforeseen public-health crisis, Ergen’s already ambitious plan is looking like an even bigger stretch. If that plan gets waylaid, T-Mobile’s market power and that of its only two remaining national competitors — Verizon Communications Inc. and AT&T Inc. — would be left unchecked, creating more of an opportunity for the industry to raise prices after this pandemic.
The company at the center of all this is Dish Network Corp., Ergen’s satellite-TV service that he’s trying to morph into a 5G wireless company using valuable spectrum licenses he’s collected over the years. Yields on Dish’s debt spiked in March, and they’re still at the highest level in seven months. Assuming Ergen needs only $10 billion to build his network, “the interest costs alone would consume 60% of Dish’s pre-recession free cash flow forecast,” Craig Moffett, an analyst for MoffettNathanson LLC, wrote in an April 14 report. (Moffett estimates $10 billion won’t be enough.)
There had been speculation that Amazon.com Inc. and Google might want to team up with Ergen. But now, it’s not only costlier for Dish to raise money to build the network, it may be that much riskier for other companies to get involved. Dish gets to rent access to T-Mobile’s network for the next seven years, so any partners would need to be confident that Dish could have its own network ready by that point. It doesn’t need the $10 billion all at once, but it will have to offer 5G service to 70% of the U.S. population by June 2023 or face a hefty fine. Its stock price is signaling doubt:
Dish has $3 billion of cash and equivalents and $1.1 billion of bonds coming due in May. It had planned to spend as much as $500 million this year on its wireless initiatives. It’s also expected to close soon on a $1.4 billion acquisition of Boost Mobile, a prepaid wireless brand that Sprint was forced to divest as a condition of the T-Mobile deal. Boost serves mainly lower-income consumers in urban areas, making it particularly vulnerable during the economic downturn.
It’s baffling that the Justice Department and the FCC would give their blessing to the Sprint deal and leave consumer protections riding on an industry newbie. Even so, Ergen, 67, has made a career of waving off skeptics. As a former professional poker player, he holds his cards close, leaving others in and around the industry constantly wondering whether he knows something advantageous that they don’t, or if he’s bluffing — or simply brash. That mystery is partly why a shrinking satellite-TV business hoarding unused spectrum is still valued north of $11 billion.
Some way, somehow, Ergen may still get his network. But maybe the government’s idea to trade one wireless carrier for another was as hare-brained as it sounds.
--With assistance from Brian Chappatta.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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