Description

Situation Overview:

For the better part of the last few years I have either been short DISH, short Charlie Ergen’s dream or regretting making any covers. I also had a few regrets selling my Charter (CHTR) position lower, but that’s a different story.

I think for the last few years it has been difficult to get behind investing in Ergen’s playbook, and in his dream of building out a wireless network. Capital intensity, especially spending capital on unknown returns as well as unknown duration is not an easy investment proposition.

Today is November 10^th 2020. I am long DISH. We already know DISH provides television service to ~12 million customers. We also already know DISH owns wireless spectrum including 600MHZ, 700MHz, AWS and mmWave and he is a potential bidder in the upcoming C-Band auction on December 8^th. DISH also owns part of Sprint’s prepaid wireless business that they purchased as part of the regulatory remedy from the T-Mobile Sprint transaction that was able to close after multiple tries.

Duration:

There are various trades approaching that some view as call options I suppose. I view them as entry catalysts that ‘may’ unlock value over the next several years and creates an opportunity for various types of shareholders to buy the stock, similar to generalist investors rotating into FANG or even SAAS years ago, which has led to incredible returns driven by the direction of fundamentals and multiple expansion. I believe you can play each approaching catalyst using listed or OTC derivatives, credit default swaps, common stock or just come along for ride that I envision to be a ~3 year investment although I can see how this could take 5 years for the complete value unlock/momentum trade… Wall Street has a way of being ahead of the investment narrative once the momentum/factor investors participate.

Financials:

Let’s just do a quick snapshot here (not a lot of differentiation in sell-side models so I am rounding):

Sales Estimates: 2020/2021/2022 15.5bn 17.5bn 17bn

EBITDA Estimates: 3.2bn 3.7bn 3.5bn

Capex: 550 1.01 1.1

FCF: 3bn 2.9bn 2.6bn

Debt 14bn (excluding new financing that comes in)

Cash snapshot: 3.5bn

Monitored KPI’s from recent print:

Pay TV net adds 116k

DISH TV net adds -87

Sling net add 203

Churn TV 1.4%

Pay-TV ARPU 91.79

Wireless net adds -212

Catalyst Path:

• Activism: no one is going to file a 13D and force Charlie to do anything. However, I do believe there are various cheerleaders/supporters/early stock adopters with TMT expertise that show up
• C-Band auction December 8^th is projected to raise $30-$40bn. Charlie is a spectrum HODL’r, and he may/may not participate. If he does participate he is going to need capital. See next catalyst
• Financing Partner(s): DISH is likely to partner with financial and strategic players. The unexciting partners would be large PE firms investing in a ‘high coupon paying’ preferred. The more exciting investment partners could be a range of players including Apple, Google, Amazon, Facebook, etc that participate in equity/hybrid/debt financing. There have been a couple reports recently speculating on various partnerships including Apple partnering with DISH to set up a private 5G network; Partner with Elon Musk’s, Tesla for private 5G network, as well as hospital clusters.
• New FCC Head coming in January as Ajit Pai departs

The above catalysts are focused on becoming the #4 wireless player. However, I do believe that a merger between DISH and DTV could come to fruition. To pinpoint the timing here is difficult. In addition, there is a recent NY Post article (https://nypost.com/2020/10/06/att-pushes-ahead-with-auction-of-directv-despite-lowball-bids/), although I would call this more of an article plant, that ATT is looking to part ways with DTV, which makes sense. I can envision DISH and DTV coming together or DTV/ATT doing a transaction with private equity players to separate out the asset, attempt to ‘clean it up’ even more and position it for a DISH transaction down the road.

A merger between DISH and DTV could likely drive very large synergies. I have seen estimates as large as $3-$5bn. Will regulators allow this transaction? This has been part of the issue for many years, but I do think the T-Mobile Sprint transaction demonstrates that if you try try and try again, the stars can align. I don’t think the regulatory paths are apples to apples, but with new FCC commissioner, and AT&T is a motivated seller perhaps it can happen down the road.

Summary:

Charlie has invested $20bn in spectrum vs a current equity value of $15bn. He has basically pushed all of his chips in personally and professionally. What’s the upside you may ask? I think applying a sum of the parts analysis has merit, but there are a lot of risks with that approach. I think DISH today trades at unchallenging valuation with a catalyst rich path ahead of it, and if the shareholder base takes shape in a similar manner as it did with Charter where you have generalists, value investors, garp, passive, et al I can see the shares trading to $40-$45 over the next ~12 months or 50% higher from the recent trading range. In the event, that DISH and DTV do effectuate a merger, the shares could trade closer to $75-$100 depending on regulatory (behavioral and tangible) remedies how long it takes to close (likely 18 months).  

The above write up doesn’t necessarily has a variant view, and there are risks with this investment (cord cutting, leverage and value factor, financing partners aren’t brand name or capital raised is low, key man risk, competition, debt(albeit there are protections here) et al), however, it feels like a sale of DTV could put a floor in the ‘valuation multiple floor’ floor for DISH or perhaps lead to a transaction, and the path to value unlock for wireless is becoming more visible as the duration becomes more certain.

Charlie has pushed all of his chips in…Long DISH (own a few call options too).

Catalyst

• "Activism" / supportive cheerleaders 
• C-Band auction 
• Strategic Financing Partner(s)
• Regulatory Regime Change leading to DTV valuation floor