Description

Legitimate concerns about cord-cutting, Satellite’s disadvantaged competition position versus cable, increasing uncertainty and delays around spectrum monetization, and a leveraged balanced sheet supported by a declining core satellite business have weighed negatively on Dish stock and created an attractive risk/reward. Despite the problems, I believe the value of the assets is well in excess of the current EV and the margin of safety has increased as the stock has come down from a high this year around $66 to $48, exacerbated recently by worsening sentiment in the pay-television sector. CEO Charlie Ergen probably has as much skin in the game as any CEO of any public company, aligning his interests with shareholders.   

Dish has three main assets

1-Wireless spectrum portfolio

Dish is one of the largest spectrum holders in the United States, having invested about $21B in spectrum licenses over the past decade. WERD’s write-up on Dish does a fantastic job detailing the composition of the portfolio, the different bands owned, and the history of acquisition and prices. I would only add since WERD’s write-up, Dish spent $6.2B in the 600MHz auction that concluded in April to acquire low-band spectrum.

            People have strong views, both positive and negative, on spectrum values, as the VIC boards show. My view is that Dish’s spectrum is undervalued because it will be deployed for 5G, which is likely to establish a very different, and better, set of economics for wireless spectrum owners than previous generations of wireless technologies, which have mainly been focused on the retail consumer wireless business, historically dominated by AT&T and Verizon. 5G will connect billions of devices to the internet (“Internet of Things” or “IoT”), industrial wireless applications will emerge that do not exist today, and wireless networks will be configured for specific applications that will make the networks more efficient and more specialized. 5G wireless networks will support applications and use-cases to service healthcare companies, municipalities, auto companies, agricultural companies, and many others. These users will want a network to provide some measure of security, capacity, coverage, and reliability, depending on the application and use. Dish’s spectrum portfolio will allow it to build a new nationwide wireless network tailored for 5G, an irreplaceable infrastructure asset that should support growing connectivity needs for decades.

            Dish bears believe that Dish has wildly overpaid for spectrum in many auctions. The most common argument to support the idea that Dish overpaid is to look at past spectrum auctions and see what the wireless carriers paid for different spectrum bands based on price per MHz POP. I believe that past auction values are not that helpful in valuing Dish’s portfolio going forward because the prices paid by wireless carriers were ultimately derived from the underlying economics of the consumer wireless business—which was characterized by low switching costs, a duopoly industry structure that controlled the vast majority of low-band spectrum, low levels of pricing power, and a deflationary trend in retail wireless data pricing ignited by TMobile. Effectively, wireless providers deployed spectrum to provide connectivity in order to charge customers for increasingly commoditized and low-value services, such as talking and texting. The return on incremental capital that any wireless carrier could expect was going to be a function of the economics of the industry and the competitive position of that carrier in the industry—which impacted spectrum values at auction. For the reasons stated above, 5G should have different and better economics, driven by a large new base of industrial customers that will shape the market and make it look different than the consumer wireless market that has shaped expectations around spectrum values in the past.

            The auction that I believe most closely mirrors the replacement value of a large block of Dish’s spectrum is the AWS-3 auction in 2015, which was the first major auction for mid-band spectrum, which is ideally suited for a variety of 5G applications. I would refer to WERD’s write-up for a discussion, but will note that I believe Dish’s mid-band portfolio alone could be worth over $40B, more than the current EV.  

            I believe the replacement value of Dish’s full spectrum portfolio is somewhere between 40-$60B. Charlie Ergen publicly stated that he believes that he got better than $.50 on the dollar for the $6.2B in low-band spectrum he acquired in the 600MHz auction.

            The clearest way to put a value on the spectrum would be for Dish to sell the whole spectrum portfolio---most likely to Verizon—which bulls were hoping would happen—but now appears not likely to happen. The second way to show the value would be if Dish could monetize some portion of the spectrum by taking on a strategic partner, either for a stake in the Company, or for a stake in a new network, or leasing the spectrum. I believe that this is more likely to happen because Dish has said that it will need some financial help building the 5G network. I think there are many potential investors, both strategic and financial, that would have an interest in owning, leasing, or having economics in a new 5G network.

2-DBS Business

Dish has a declining direct broadcast satellite (“DBS”) business that sells pay-television subscriptions. I estimate the business has about 11mm subscribers (I assume Sling TV has 2mm subscribers). In 2017, the DBS business should do around $2.5B in EBITDA. This business will continue to decline to due cord-cutting and satellite's inability to bundle high-speed residential broadband. I value DBS between $10-$15B. Most likely, it should be valued near the low-end of that range. Despite the fact that it will decline, it will generate strong free cash flow for some time. Dish has a large rural pay-television customer base that should be fairly sticky because cable cannot serve some rural markets. There is also a possibility that Dish could combine this business with DirecTV, which would produce a lot of synergies and could possibly allow Dish to realize value at the high-end of the range, though I view that as a low probability given that AT&T is going to have its hands full integrating Time Warner.

3-Sling TV

Sling TV is Dish’s OTT video product, the leader in the virtual MVPD market. The service was launched in 2015, and although Dish does not break out subscriber numbers, it has been reported that Sling has around 2mm subscribers. I believe this asset has meaningful upside from subscriber growth and programmatic advertising revenue, if Dish can scale Sling TV and become one of the few surviving virtual MVPDS. Today, this market is competitive, with Sony Vue, Hulu, YouTube and others. In three years, it is unlikely that the market will support several sub-scale companies; more likely, only a few be left. If Sling can survive, it will enjoy a dual revenue stream from subscription + advertising, and should be well positioned for the growth of addressable advertising delivered over the internet against premium live video, which can become a great business. If Sling TV does not work out, it is probably worth nothing. If it does work, it could be worth several billion dollars and will be a good strategic asset for connectivity companies that want to bundle video to reduce churn for a larger wired/wireless data business. The option value of Sling working becomes more meaningful as Dish stock goes down, because the market probably ascribes no value to Sling today, and it could end up being worth 5-$10B in a few years if it can survive. There is a virtuous cycle for OTT services as they grow that can increase the value meaningfully in a fairly short amount of time. 

Charlie Ergen

I believe Dish CEO Charlie Ergen is a bold, patient and visionary CEO who is interested in building long-term business value. I think he sees 5G as an enormous market that will create new and large businesses, maybe industries, with wireless spectrum providing a foundation for a lot of this growth and innovation. A lot of this investment will depend on that view being right.

      The bears believe Charlie desperately overpaid for spectrum in the hope that he would be able to resell the spectrum to AT&T or Verizon at a later date because all of the carriers would want to get the spectrum because of the increasing data traffic on their networks. That is not a great plan and I don’t believe that Charlie would risk the entire company, and a large self-made fortune, on the hope that one of two companies will bail him out by paying him a big premium for his spectrum. But time will tell. Bulls have to consider that Charlie is fallible and his plan did not work. 

Valuation

Dish’s stock trades at $48.47. I estimate the spectrum +DBS + Sling is worth between 50-$75B, or between $70-$126/share  (I am not including convertible debt share dilution, am not giving Dish credit for cash, and am not including any potential liability for the deficiency Dish could owe for AWS-3 forfeited spectrum due to loss of bidding credits).

Catalyst

Partnership to monetize spectrum; sale of the company