No Discounts. No Deal?


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After the FCC’s meeting last week, reports have surfaced that Chairman Tom Wheeler has circulated an order recommending rejecting Dish Network’s use of the Designated Entity bidding discounts in the AWS-3 spectrum auction. By using two smaller companies that Dish had an 85% stake in, they were able to secure $3 billion in discounts. Dish claims they followed the rules, but Commissioners and other companies claim it was unfair. “In light of the strong Congressional criticism of Dish’s use of DEs, the FCC has a political motive to deny the discount,” Jonathan Chaplin at New Street Research explained. “As such, investors should not assume that the FCC’s action is solely driven by an assessment of the strength of its legal position against Dish. We doubt that Dish’s legal position and DE structuring was premised on the hope that the FCC would interpret an ambiguity in the law in its favor, as there have been a number of cases in which the FCC has offered its views on the indicia of control. We are certain the Dish lawyers relied heavily on those precedents in crafting the legal structure and doubt they were trying to create new law.” Some investors have asked how this impacts the company’s merger discussion with T-Mobile, and possible others. Chaplin says, “It’s tough to say. The treatment of the discounts in the valuation discussions was very likely a sticking point. On the one hand this takes the issue off the table (the additional $3.3 billion payment will likely be fully reflected in Dish stock in short order). On the other hand, it would have pained [Dish CEO Charlie] Ergen to issue equity at $70 because his spectrum is grossly undervalued; it will pain him that much more to issue equity at something less. Any deal Dish does will likely deliver tens of billions in incremental value over time; the issue of the $3.3 billion shouldn’t materially impact the strategic or economic value for either side; however, Ergen has been known to ‘watch his pennies.’ We don’t think a deal will be held up until the litigation is resolved; there is way too much strategic value at stake for anyone to wait that long; it just impacts the price.”

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