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In the wake of Dish Network Corp.'s unsolicited $25.5 billion offer for Sprint Nextel Corp., one thing is clear: a merger between the two companies would put the issue of spectrum assets at the center of any review by the Department of Justice and the Federal Communications Commission.
Dish's bid represents a 13 percent premium over Japan-based Softbank Corp.'s $20.1 billion offer for Sprint, which is still under regulatory review, and the most aggressive move yet by the company to break into the wireless market and decrease its reliance on its satellite TV business--with a formidable amount of spectrum.
Four months ago, Dish secured FCC approval to use 40 MHz of spectrum that it had acquired from bankrupt satellite operators TerreStar Networks Inc. and DBSD North America Inc. for mobile broadband services, giving it the largest, contiguous, nationwide block of spectrum for such services in the United States. Now the company is vying for Sprint, the distant No. 3 wireless carrier in the country behind Verizon Wireless and AT&T Inc., with spectrum again as its motivator. Dish in January made an unsolicited bid for Clearwire Corp., in which Sprint has a majority stake and, with Softbank's cash infusion, has also sought to take over entirely.
All told, if Sprint accepts Dish's offer and spurns Softbank, and Dish successfully acquires Clearwire outright, Dish would control roughly more than 250 megahertz of spectrum nationwide, on average--twice as much as what either Verizon or AT&T now occupy.
Such a result would run counter to the FCC's decision in 2011 to block AT&T's $39 billion acquisition of T-Mobile USA Inc., as well as the Department of Justice's recent position that the FCC should impose “caps” to ensure that smaller wireless carriers can access spectrum.
“The DOJ and FCC are in a no-win situation out of their own fault,” Roger Entner, analyst and founder of Recon Analytics, who follows the wireless industry, told BNA in an interview April 15. “If they allow the deal to go through, then they will be contradicting themselves. If they don't allow it, then they'll be preventing a stronger No. 3 competitor--because they have been in this drive for more carriers. They just wanted Dish to go away and build its own network…and be carrier No. 5. Oh well.”
Adding another twist, Clearwire disclosed in a securities filing April 12 that the company has another bidder, on top of Sprint and Dish. Several industry sources confirmed to BNA April 15 that the bidder is Verizon Wireless. But Verizon's $1.5 billion offer is only for Clearwire's spectrum.
Clearwire currently holds more than 9,000 2.5 gigahertz licenses and leases covering 411 of the 493 basic trading areas, or BTAs, in the country. The company maintains an average of 120 MHz to 150 MHz of spectrum across its geographic market holdings--by far the largest single spectrum holder among wireless carriers, even including Verizon and AT&T.
For Softbank, Sprint, and Dish, Clearwire's spectrum is crucial for rolling out 4G LTE (fourth-generation long-term evolution) services nationwide.
For Verizon, Clearwire's spectrum would augment its own already-significant spectrum portfolio. The company last year obtained FCC approval to buy spectrum from four of the nation's largest cable operators for $4 billion, and is the market leader in 4G LTE.
These developments, taken together, highlight how the biggest players in the communications landscape are working to outduel each other to control a resource--spectrum--needed to meet the ever-increasing consumer demand for smartphones and tablet computers, which require more spectrum to carry their data transmissions--significantly more than what is needed to carry cellular telephone calls.
“At a minimum, recent wireless transactional activity (and chatter surrounding it) underscores the critical importance of spectrum as the essential wireless input amid a steady migration of capital and innovation to mobile broadband platforms,” wrote Jeffrey Silva, senior policy director of telecommunications, media, and technology for Medley Global Advisors, LLC, wrote in a research note issued April 15. “The long-term trend for wireless data demand appears favorable, but government efforts to replenish the dwindling supply of mobile airwaves remain uncertain even as signs of progress emerge here and there. It is possible that heightened wireless M&A [mergers & acquisitions] interest reflects market uncertainty with respect to degree of success U.S. policymakers will have with the broadcast 'incentive' auction, government spectrum sharing and reallocation, LightSquared regulatory resolution, and regulation/antitrust enforcement. More than anything, it is spectrum that's in play.”
Overall, Dish and Sprint appear uniquely positioned for a bright “broadband future,” said Jennifer Fritzsche, a senior analyst with Wells Fargo Securities.
The transaction, Fritzsche noted, will create a company with a critical mass of subscribers in both pay-TV and broadband internet services, and modern satellite and terrestrial networks to enable delivery of an integrated mobile and fixed video, voice and data experience. The combined company will also have a robust spectrum footprint, with a good mix of low-band spectrum for coverage--Sprint's 850 MHz spectrum--mid-band spectrum for capacity--Sprint's 1900 and Dish's 2000 MHz--and high-band spectrum for densely populated areas--Clearwire's 2.5 GHz licenses.
Analysts at Stifel Nicolaus added that the bid makes more sense for Sprint, namely because of the 13 percent premium over Softbank's offer and the fact that a Dish-Sprint combination would offer much higher “synergies” between the two companies.
At the same time, however, the combined company would have almost $36 billion in debt, with a large portion of its revenue coming from pay-TV subscribers, which is declining. Dish would also have to issue an additional $9 billion of debt to finance the cash portion of its offer, as well as pay a $600 million breakup fee to Softbank if the deal is ultimately consummated.
What is more, Stifel analysts wrote in a research note April 15, Softbank is in a better position financially to match or raise Dish's offer, putting Sprint in a solid position from a negotiating standpoint.
Softbank has all the incentive to obtain the final regulatory approvals.
The Department of Justice already has cleared the Softbank-Sprint-Clearwire deals on antitrust grounds.
The DOJ, Federal Bureau of Investigation, Department of Defense, and the Department of Homeland Security, as well as the Committee on Foreign Investment in the United States (CFIUS), are reviewing the deals for national security implications.
As for the FCC, the agency's review is proceeding according with a 180-day transaction “shot clock” for completing transactional regulatory reviews. April 15 was day 136.
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