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We Wouldn’t Bet on Dish Network, T-Mobile Merger

We have doubts that the two firms will be able to reach agreeable merger terms and think that both will seek out other partners.

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The Wall Street Journal has reported that  DISH Network (DISH) and  T-Mobile US (TMUS) are in merger talks. The firms have reportedly agreed that T-Mobile CEO John Legere would serve as CEO of the new firm, with Dish CEO Charlie Ergen chairing the board. While agreeing to the respective roles of these strong personalities is an important step, we are still doubtful that the two firms will be able to reach agreeable merger terms. T-Mobile's recent resurgence is likely to have increased the confidence of majority owner Deutsche Telekom in the U.S. carrier's long-term potential and value. On the other side, Ergen has repeatedly commented on the high valuation he believes Dish's spectrum holdings should fetch. We are sticking with our stand-alone fair value estimates for each firm at this time, though we would much rather bet on T-Mobile's takeout value than Dish's.

A merger of Dish and T-Mobile would make some strategic sense, as T-Mobile would benefit from access to Dish's large spectrum holdings. However, T-Mobile's biggest spectrum need is in lower frequency bands, not the higher frequency licenses Dish holds. As such, we believe T-Mobile's top strategic priority, as it relates to spectrum, should be the upcoming broadcast spectrum auction, an event that will require significant capital. Merging with Dish, even in an all-cash deal, would create a highly leveraged firm lacking the balance sheet strength to bid aggressively. The combined firm would also lack the financial strength to aggressively build out Dish's spectrum holdings, which is important given the buildout requirements on these licenses. We aren't convinced that adding Dish's satellite television customers to T-Mobile's wireless business adds much long-term strategic value.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.