CLWR Clearwire Corp. - Class A (MM)

DISH Network (DISH) – the second largest satellite TV operator in the U.S. – made a fresh proposal to completely acquire Sprint Nextel Corp. (S), the third-largest wireless carrier in the U.S., for $25.5 billion. DISH Network will make both cash and stock offers to complete the whole transaction.

In a bid to expand its operation in the lucrative U.S. market, Japanese telecom carrier, SoftBank Corp., proposed to buy 70% of Sprint’s stake for a total consideration of $20.1 billion. However, DISH Network outbids SoftBank’s proposal by making a counter offer of $7 per share (inclusive of $4.76 in cash and 0.05953 shares in Dish for each Sprint share).

DISH Network’s objective to acquire Sprint Nextel came on the back of achieving FCC’s recent approval to set up wireless network across its footprint. The acquisition of DBSD North America Inc. and TerreStar Networks Inc. for $2.9 billion, has given DISH Network access to 40 MHz of satellite spectrum.

Such a massive spectrum portfolio will not only allow DISH Network to set up wireless network but will also enable it to offer triple-play services (voice, video and data) to its customers, thereby controlling subscriber loss. Moreover, the S-band wireless spectrum will also help the company to deliver online HD movies to its customers whether at home or away.

However, DISH Network’s plan to set up wireless network without any wireless partner will be an extremely difficult task as it requires huge investment and marketing support. So, to move on with its set objective, the company had earlier bid for Sprint’s sister concern – Clearwire Corporation (CLWR) – at $3.30 per share.

The deal looks a little complicated as Sprint has already proposed to buy Clearwire for $2.97 per share. Moreover, Clearwire has already entered into a deal with its parent company to take financial help for deploying 4GLTE across its footprint.

We believe that if DISH Network is successful to acquire Sprint, it will generate positive synergies for both the companies in terms of countering stiff competition from market leaders AT&T (T) and Verizon Communication Inc., which dominate nearly 35% of the U.S. market. Moreover, the combined entity (both DISH and Sprint) will have nearly 60 million subscribers coupled with $14 billion cash position.

Likewise, it will also allow Sprint to overcome its spectrum shortage issue and will also help the company to gain financial strength to deploy 4GLTE service across its footprints.

On the flip side, the successful completion of the deal will also generate few negative synergies for both the companies. The complete acquisition of Sprint Nextel will inflate DISH Network’s leverage position by a huge margin as the combined debt of both the companies will stand at nearly $28 billion.

DISH Network exited fiscal 2012 with an enormous $11.6 billion in long-term debt and $7.4 billion in cash. So, a further issue of debt will increase the financial risk for the company in terms of higher interest payments and increased leverage.

Recently, DISH Network raised $2.3 billion debt from the market. In the next five years, senior notes worth $4.7 billion will mature for DISH Network. Moreover, a debt of $500 million will be due in the current year. Hence, we believe that constant maturity of debt during this five-year period will not only affect DISH Network’s cash position but will also impact its future plan to rollout mobile broadband network across its footprint.

This will also hurt Sprint as the company will pay nearly $600 million as break-up fee to SoftBank.

Hence, we believe that it is just the beginning of a new war and SoftBank will respond back strongly with a better offer as the company has already hedged the falling yen against the U.S. dollar (SoftBank hedged its Japanese currency at $1 = 82.2 yen). Moreover, Japanese banks are ready to lend at the lowest possible rate, thereby helping SoftBank to raise more debt for buying out Sprint Nextel.

Currently, DISH Network has a Zacks Rank #3 (Hold).

 
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