Dish's EchoStar Buy Seen Helping It Finance 5G Ambitions
Dish Network's proposed buy of EchoStar, announced Tuesday, should help debt-laden Dish shore up its finances as it spends heavily to complete its terrestrial 5G network, analysts told us. The deal is considered unlikely to face antitrust or other regulatory challenges. Dish spun off EchoStar in 2008.
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EchoStar CEO Hamid Akhavan, who will be CEO of New Dish, said in a call with analysts the Dish transaction won't disrupt EchoStar's current design work for a possible constellation of hundreds of low earth orbit satellites for wideband 5G service, though it's not committed to building such a system. "We will continue to look at that," he said. He said "one of the biggest holes" facing EchoStar in entering the direct-to-device market was its lack of North American spectrum -- a hole filled by Dish's spectrum assets. He said mobile supplemental coverage from space "is the next Holy Grail of communications," allowing ubiquitous connectivity. "That's a game changer we activate with this merger," he said.
The all-stock EchoStar deal is "the obvious way" for Dish to fund its 5G plans given the challenging borrowing marketplace, said satellite and spectrum consultant Tim Farrar. With this move, Charlie Ergen, chairman of both companies, "is no longer spreading his bets between two companies -- he is going all in," Summit Ridge Group founder Armand Musey said in an email. "DISH has a lot of debt, not much borrowing capacity left, and a hugely expensive wireless buildout ahead of it. (Re)combining with EchoStar would provide additional cash flow and borrowing capacity. EchoStar’s Hughes division may also have some technology and people that could help with DISH’s wireless deployment. However, the risk to Echostar increases significantly as Echostar is tying its fortunes to DISH and DISH’s more risky wireless venture."
"Dish is highly leveraged with negative cash flow, EchoStar isn’t leveraged at all with positive cashflow," emailed Recon Analytics' Roger Entner. The deal "will give the combined entity more leeway to raise money to build out its 5G network and market it to people." Vertical mergers like Dish/EchoStar typically face few regulatory hurdles, he said. New Street Research's Blair Levin emailed that FCC approval will likely be needed, but there's no effective change in control, so it should be a pro forma process.
EchoStar's $1.7 billion cash on hand, plus potentially some additional borrowing capacity that the deal brings, remains insufficient to complete Dish's 5G network buildout or to finance the purchase of T-Mobile's 800 MHz spectrum, MoffettNathanson's Craig Moffett wrote investors. There's heavy attention on the EchoStar buy, but "the real story is the collapse in Dish’s cash generation capacity," with its dwindling direct broadcast satellite, Sling and Boost prepaid mobile businesses, he said. The deal won't give Dish the cash it needs to buy the 800 MHz spectrum but should alleviate concerns about settling the $1 billion in convertible notes due early next year, New Street Research's Jonathan Chaplin wrote investors. Network capital expenditures are declining and EchoStar bringing additional liquidity means Dish may not need to raise further funds until 2025, he said.
“By no means have we solved all capital constraints,” but it now has more financial flexibility, Ergen told analysts. He said the 800 MHz option to buy technically expires later this month, but the continuing negotiations means "things will remain open."
The companies said the transaction has been unanimously approved by both boards and should close by year's end, pending regulatory approvals. Ergen will be executive chairman of New Dish, with Dish Wireless President John Swieringa as chief operating officer and president-technology. The companies said Dish CEO Erik Carlson will leave after the close of the transaction.
Ergen said the deal grew out of increasing demand for satellite-to-ground communications, with the two companies not finding those opportunities feasible on their own. “Put the companies together, we knew we could do something between satellite and ground terrestrial,” he said.
Swieringa said fixed wireless opportunities are "on the road map" for Dish, but the company has been focused on other priorities first, such as setting up its retail operations for its 5G service.