Consolidation Ahead

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The Wall Street Journal reported that Dish Networks is in talks to merge with T-Mobile US, which would put Dish Chief Executive Charlie Ergen as the company’s chairman with T-Mobile’s John Legere as CEO. As expected, industry analysts have a lot to say about this potential deal:

Colby Synesael of Cowen and Company: “We have called out in multiple recent reports that we view T-Mobile as an ideal and attractive takeout candidate given the only viable U.S. wireless assets available. On that note, while timing is not ideal we think cable MSO’s including Comcast could revisit strategic options and also make an offer for T-Mobile…We believe regulatory [issues] would be a non-issue and likely favored considering 1) the FCC approval of AT&T and DirecTV is eminent and 2) four players will remain in the market with an even stronger competitor against AT&T and Verizon. Derivative calls: would be viewed as negative to Sprint who effectively gets nothing while T-Mobile/Dish get stronger, positive for the towers where risk of a Sprint/T-Mobile merger goes to zero and we get more clarity on how/when Dish spectrum would get put to work, and we’d argue negative to AT&T/Verizon from the perspective T-Mobile would be a more formidable competitor.”

Jonathan Schildkraut at Evercore ISI: “We see a number of potential strategic benefits from the proposed combination: (1) significant spectrum resources (T-Mobile has roughly 84MHz of spectrum and Dish has roughly 81MHz with both having concentrations in the AWS and PCS bands plus a little 700MHz); (2) ability to deliver wireless broadband to rural markets (markets to which Dish customers are over-indexed); (3) add significant spectral capacity to TMUS’s network in urban and more densely populated sub-urban markets; and (4) a strong cultural fit (based on market disruption and addressing customer pain points)… Dish generates a fair amount of FCF [free cash flow] on its core business, while T-Mobile is expected to inflect to FCF positive in 2015. The combination of growing cash flows would allow for more aggressive network investment – particularly in markets where T-Mobile may need additional scale (i.e., more rural markets).

Kevin Smithen at Macquarie Securities: “In our opinion, this deal is about the potential for OTT [over-the-top content] mobile video delivery and quad play converged services and validates the AT&T/DirecTV deal in our view. Verizon remains strategically challenged in our view, and would be the biggest loser if Dish T-Mo happens…We like the commanding spectrum position of the combined company although we don’t think this is what the FCC had in mind for Dish’s spectrum (preferring a buildout), and will most likely require substantial spectrum sales…Other things to consider is whether this deal will distract T-Mo’s management and derail its near term momentum. Furthermore, it remains to be seen whether Legere can work under Ergen long-term, in our view.”

Spencer Kurn of New Street Research: “Dish’s spectrum deployment has long been a potential catalyst for the towers; however, with so much uncertainty around Dish’s plans the market has had very low visibility around the timing of a deployment. If a merger with T-Mobile consummates, the path to deployment becomes clearer and the market should start pricing it in. Crown Castle has best positioned itself to capture additional growth in the U.S. by acquiring the T-Mobile and AT&T Tower portfolios, although they have surrendered a lot of upside through their generous MLA [minimum liquid asset] terms. It is difficult to gauge how much free capacity T-Mobile has utilized in their MLA with CCI. We have assumed that T-Mobile has ample capacity left to deploy Dish spectrum over the ~7,200 sites they sold to CCI at no cost; however, if CCI can monetize this deployment there could be even more upside.”

And finally, Jennifer Fritzsche at Wells Fargo: “If this deal comes to fruition, it changes a lot–but not necessarily near term. Content is clearly becoming a large part of the conversation in wireless. While Dish/T-Mobile clearly would get in that game, they do it with a much less developed network than AT&T and Verizon. It could come, but it will take time in our view. We are getting the most questions around what Verizon “needs” to do given AT&T / DirecTV, and now possibly Dish / T-Mobile. We say nothing right now and actually think a less disruptive T-Mobile, and possible spectrum divestitures could be a good thing for both AT&T and Verizon… An obvious beneficiary from a Dish/T-Mobile merger is the towers. Dish has 40 megahertz (MHz) of 2.0GHz, 10MHz of H block and 6MHz of E block 700MHz spectrum, all of which has not been built. We expect that the light up of this spectrum is very much part of the plan. T-Mobile has already shown a willingness to use the tower companies to help expand its footprint with the sale of its tower portfolio in 2012 to CCI.”

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