Charlie Ergen’s $25.5 billion bid for Sprint Nextel Corp. (S:US) is a gamble that two perennial underdogs can transform their industry by giving customers cheap mobile-phone service and the ability to watch TV wherever they want.
Ergen, the billionaire co-founder of Dish Network Corp. (DISH), announced the offer for Sprint (S) yesterday, arguing that untapped wireless airwaves and operational efficiencies will lead to cheaper data plans for consumers and a new era of out-of-home TV viewing on mobile devices. The result will be a media industry where Dish’s example forces competitors’ prices to come down across the board, Ergen said in an interview.
Ergen’s pitch isn’t just to consumers -- it’s also aimed at Sprint shareholders, who would have to accept Dish’s debt-laden offer instead of a board-approved deal with Japanese wireless carrier Softbank Corp. (9984) Ergen says Englewood, Colorado-based Dish will be more effective at disrupting the industry than Softbank, just as it did with satellite TV in the ’80s and ’90s.
“The reason this deal is better for the consumer than Softbank has to do with what happened when we got into satellite TV originally,” Ergen said. “The cable guys’ price increases started to be less, the customer service started to be better, and they started investing in their plant and equipment that ultimately yielded high-speed broadband. The same thing will happen here.”
In making his counteroffer, Ergen is going up against fellow billionaire Masayoshi Son, the president of Softbank, who sees Sprint as key to a U.S. expansion. Son’s goal is to create the largest mobile-services provider in the world by revenue, surpassing Verizon Wireless and China Mobile Ltd.
Softbank said its offer for Sprint will give U.S. customers “superior short- and long-term benefits to Dish’s highly conditional proposal,” according to a statement today. Softbank, based in Tokyo, expects to consummate its deal July 1.
Under Ergen’s plan, Dish would combine its 14 million pay-TV users with Sprint’s 47 million mobile-phone customers, creating a new pool of subscribers who can get all their video, voice and Internet services from one place. The idea is to provide a consistent experience to viewers -- whether they’re inside their homes using a satellite dish or outside using wireless networks.
While Verizon (VZ) and AT&T Inc. (T:US), the two largest wireless carriers, already offer a bundle of services, neither has as many television customers as Dish. They also rarely promote the idea of a so-called quadruple play: having landline, wireless, Internet and television service on one bill.
Ergen’s company is the third-largest U.S. pay-TV provider, behind Comcast Corp. (CMCSA:US) and DirecTV. (DTV:US) Sprint, meanwhile, is the third-largest U.S. wireless carrier, trailing Verizon and AT&T.
The question is whether combining third-place competitors in different industries will create something bigger than the sum of their parts. Taking customers from AT&T and Verizon also won’t be easy, given their entrenched positions, said Jaison Blair, an analyst at Telsey Advisory Group in New York.
“You’re going up against a terribly powerful duopoly in AT&T and Verizon,” Blair said in an interview. “Investing in the No. 3 wireless player is probably not my idea of a great place to generate a return on capital.”
It’s also not clear that consumers care about getting all of their services from one provider. Time Warner Cable Inc. (TWC:US) Chief Executive Officer Glenn Britt, who runs the second-largest U.S. cable company, has questioned whether customers want wireless and TV services on the same bill.
“We’ve had this idea, we’ve had it for some time, that bundling wireless broadband in with our other products to create a so-called quadruple play might be interesting,” Britt said in July 2011. “We’re not sure, and the marketing evidence is mixed.”
Ergen says the appeal of the bundled services will increase as more people watch video on mobile devices. The 60-year-old, a former professional blackjack player, has been ahead of the curve before. After he co-founded Dish in 1980, he had to build support for a still-fledgling market and take on larger competitors. That gamble paid off. Ergen is now No. 90 on the Bloomberg Billionaires Index, with a net worth of $11.2 billion.
In his vision for the industry, consumers will perceive their tablets and smartphones as miniature TV screens. As more people get their video that way, the activity will put a strain on the big carriers’ networks, he said. A Dish-Sprint company can offer customers lower prices for mobile data because it will have the capacity Verizon and AT&T lack, Ergen said.
Even though it doesn’t currently have any mobile customers, Dish has been snapping up wireless spectrum in preparation for a move into the market. Those assets, combined with Sprint’s network, would mean the new company has almost twice as much spectrum as either of the two largest carriers, according to data compiled by Bloomberg.
Dish also plans not to charge customers for extra devices, an increasingly valuable proposition as smartphones, tablets and other Internet-connected gadgets multiply in consumers’ homes.
“We’ll want you to use our pipe, so we won’t charge you extra for a device,” Ergen said.
Dish is offering Sprint’s owners $4.76 in cash and 0.05953 a share of Dish for each Sprint share, a stake that would represent about 32 percent of the combined company. Based on Dish (DISH)’s $37.63 stock price at the end of last week, the bid was valued at $7 a share when it was announced yesterday. Dish said the offer is a 13 percent premium to the implied value of Softbank’s deal, which is also a combination of cash and stock.
Sprint shares jumped 14 percent yesterday after the Dish bid was announced, then rose an additional 2 percent to $7.20 today. Dish’s stock gained 3.2 percent to $37.93.
Sprint, based in Overland Park, Kansas, said its board is evaluating the Dish offer and declined to comment further.
Ergen’s vision requires Sprint investors to go along with the deal -- and for Dish to raise enough money to get it done. The combined company will have an estimated $40 billion in debt, a heavy load, said Philip Cusick, an analyst at JPMorgan Chase & Co. in New York.
Dish plans to raise about $9.3 billion in new funding to pay for Sprint and is “looking at some different alternatives” in terms of capital structure, Jason Kiser, Dish’s treasurer, said during a conference call yesterday. Because of the debt concerns, Moody’s Investors Service placed Dish’s Ba2 credit rating on review for a possible downgrade.
Softbank also could end up raising its bid, making Dish more of a long shot.
Softbank’s Son -- Japan’s second-richest man, with a fortune estimated at $11.8 billion -- has his own grand ambitions for Sprint. He wants to shake up the U.S. market by getting people to use wireless data on more devices, including cars and even bicycles, Son said in an interview in October.
If Ergen fails to convince shareholders that his vision is superior, he’ll have to move on to other options, which may include a T-Mobile USA Inc. partnership or even selling his spectrum, Blair said.
“With Charlie Ergen, you never really know what his end game is,” he said.
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