Dish Network’s $25.5 billion bid for Sprint mixes hype with reality.
Buying the cellphone carrier would help Charlie Ergen’s smaller pay-TV company, Dish Network, put its assets to work. But beating the offer from another enigmatic entrepreneur, SoftBank’s Masayoshi Son, needed a stretch. Mr. Ergen’s is to claim he can find $24 billion-worth of new revenue.
Dish generates a torrent of cash â€" it had $1 billion of free cash flow last year â€" but the future looks cloudy. Content producers are demanding an increasing chunk of revenue. Competition from Netflix and other Internet video services is growing stiffer by the day. And Mr. Ergen’s strategy of snapping up video rental firm Blockbuster and spectrum from struggling satellite firms perplexed observers.
Mr. Ergen is on safe ground saying that merging Dish with Sprint could generate savings. His famous limitations on spending could shave expenses at Sprint. Combining the two firms’ call centers and billing operations should cut costs. Dish estimates $1.8 billion of annual savings, or less than 3 percent of total spending, are worth about $11 billion today.
The Sprint bid also offers Dish an Internet survival strategy. Pay TV may wither, but if so it will be because everybody has a fast data connection. Dish noted there are about 35 million rural families in the United States without a good fiber or cable connection to the Web. Combining Dish’s 45 megahertz of unencumbered spectrum with Sprint’s network offers a way to profit from plugging this gap.
But then comes the hype. Part of Dish’s justification is that the deal would create new revenue opportunities worth almost as much, in present value terms, as the offer for Sprint. It’s the kind of vague promise that’s easy to make but very difficult to deliver.
Snatching Sprint from Mr. Son would be a huge bite for the $16 billion Dish - and it’s worth remembering that Sprint itself was worth only about $7 billion a year ago. Mr. Ergen once said he was following a “Seinfeld strategy†in which everything would become clear at the last minute.
If this is that moment, then Dish investors, who sent the company’s stock down 6 percent, aren’t yet seeing the joke.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
