Jan 9 - The evolution of DISH Network Corporation's (DISH) wireless strategy
took a step forward Tuesday, as evidenced by the company's proposal to enter
into a multifaceted, complicated series of agreements with Clearwire
corporation. In accordance with the terms of DISH's proposal, DISH would cquire,
among other things, approximately 24% of Clearwire's wireless spectrum for $2.2
billion. Fitch Ratings believes the proposed transaction is a positive
development for DISH, but could also pressure its current ratings.
If the bid for Clearwire is successful, DISH would secure a potential partner to
build and deploy a wireless network. DISH had previously signaled its preference
to participate in a network infrastructure-sharing arrangement to enter into the
wireless market as opposed to deploying a greenfield wireless network. However,
recent consolidation, investments, and spectrum acquisitions within the wireless
sector have reduced the number of potential entities DISH can partner with to
deploy its wireless network creating an urgency to establish a partnership with
Clearwire. DISH's proposal leverages Clearwire's expertise and existing assets
to construct, operate, and manage a wireless network utilizing DISH's AWS-4
spectrum and the 2.5 GHz spectrum acquired through the proposed transaction.
The wireless spectrum enables DISH to diversify its business and add mobility to
its fixed video service model while positioning the company to capture
incremental revenue and cash flow growth. DISH believes the competitive forces
within the mature video-programming distribution market may diminish the value
of the company's existing direct-broadcast satellite infrastructure. Most
notable among these competitive forces are the emergence of cloud-based services
and the migration to Internet protocol-based video content delivery.
A proposed alliance with DISH and Clearwire would clearly be a negative for
Sprint, absent any considerations on whether or not the DISH offer is valid. A
successful alliance would mean Sprint would no longer have sole control of
strategic direction of Clearwire assets, and competing interests for how
Clearwire's network is deployed would ensue. DISH proposes to acquire at least
25% of Clearwire's outstanding common stock, which along with the governance
provisions outlined in DISH's proposal, sets the foundation for DISH to
influence Clearwire's strategic direction. The DISH Clearwire alliance would
also impact the long-term strategic plans of Sprint/Softbank to differentiate
its broadband offering by virtue of the "fattest wireless pipe" potentially in
the industry to provide the bandwidth required for Sprint's unlimited plans.
DISH's purchase of approximately one-quarter of Clearwire's total spectrum
position, likely representing a significant portion of Clearwire's more valuable
wholly owned BRS spectrum, would also be negative for Sprint, as they would lose
control of a valuable long-term asset. About 60% of Clearwire's spectrum is
leased while 40% is owned.
A DISH/Clearwire alliance would also enable a new competitor access to deep
spectrum resources that would be considered a negative longer-term for Sprint
revenue, cash flow, and profitability. Considering Sprint's position as the
third largest operator, this would weigh materially more on Sprint versus
Verizon or AT&T.
We believe the incremental capital and operating costs related to DISH's
potential wireless network build out will diminish the company's ability to
generate free cash flow and erode operating margins, potentially resulting in a
weaker credit profile. We believe business risk inherent in launching a wireless
business limits the flexibility DISH has to increase leverage at the current
rating level to accommodate the incremental capital costs and EBITDA erosion
associated with the build out of a wireless network.