May 22, 2014 4:21 am

Dish Network ponders options after AT&T deal for DirecTV

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Charlie Ergen

Charlie Ergen, Dish co-founder

When AT&T announced its $49bn agreed bid for DirecTV this week, the deal appeared to leave Dish Network and the company’s one time poker-playing chairman, Charlie Ergen, out in the cold.

In the wake of the deal, shares in Dish have fallen almost 6 per cent reflecting a belief among investors that the DirecTV bid, like Sprint’s potential offer to purchase T-Mobile US, in effect removes another potential strategic partner.

But is Mr Ergen, who co-founded Dish, holding a busted hand, or could he still come out ahead in the restructuring of the US video, broadband and mobile communications markets?

Dish, now the second-largest satellite TV operator in the US, has built a sizeable spectrum portfolio by buying satellite spectrum from bankrupt companies and persuading US regulators to reclassify it for use as a fixed wireless broadband network.

Under the agreement, Dish has two years to begin building the network, find a partner to help fund the considerable capital expenditure required, or cash out and sell the spectrum.

Before the AT&T deal was announced, most analysts had thought Mr Ergen would either sell the spectrum or the whole company to an established mobile network operator, or challenge regulators by once again proposing a merger with DirecTV. Now they say his options look more limited.

“Dish Network has just been left standing,” says Craig Moffett of MoffettNathanson, who also casts doubt on suggestions that Verizon Communications, which operates the FiOS fibre-optic broadband, telecoms and TV service, could bid for Dish. “That Verizon might be a buyer is more wishful thinking than it is analysis,” he says.

Moody’s analysts agree a bid from Verizon is “highly unlikely”, adding: “Verizon would be more likely to expand its FiOS build out and invest more in content aggregation and distribution (video on demand and OTT) such as it has begun doing via its joint venture with Redbox.”

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Another option mooted by some analysts would be for Dish to counterbid for DirecTV. But Mr Ergen appeared to rule that out during a call with analysts to discuss the company’s first-quarter results 10 days ago, when he acknowledged that Dish was not in a financial position to outbid AT&T for DirecTV, or Sprint and its Japanese parent, SoftBank, for T-Mobile US

Nevertheless, Moody’s analysts argue that if Dish is to pursue its plan for a fixed wireless broadband network, its only option may be through a deal with T-Mobile US.

“The company has enough capital and financial flexibility to buy control of T-Mobile, but not enough to fund the capital that T-Mobile will need to compete with the capital spending of AT&T and Verizon Wireless, and not enough capital to build out its fixed wireless network,” they said in a note this week.

Mr Ergen also appears to see this as a possibility. Asked whether Dish would be interested in bidding for T-Mobile US if regulators blocked a Sprint bid, he said: “If Sprint didn’t proceed or was denied, then T-Mobile would have strategic interest to us.”

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Mr Ergen may be hoping that Sprint does indeed bid for T-Mobile US and that regulators reject the combination, providing Dish with the opportunity to buy control at a discounted price.

Dish would still need another deep-pocketed partner that might have been DirecTV if not for the acquisition agreement, say Moody’s analysts. “The question is: who is willing to be a partner to Dish’s controlling shareholder, Charlie Ergen, who has been known to end other partnerships in court and likes to maintain control?”

Mr Ergen is holding his cards close to his chest. Explaining his strategy to journalists last week. he said: “When I used to play poker and everybody was throwing chips and betting crazy on the table and I had really good cards, I always felt it was better just to sit back and watch them go at it . . . every time they went at it, I’d learned something. And . . . as I sat back, they didn’t learn anything about what I had. I learnt to trust my cards.”

He added: “I wasn’t a very good poker player, but when a bunch of drunken fools were throwing money around, occasionally I was able to pick up a pot at the end of the day.”

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