Dish Network's recent reunification with satellite communications firm EchoStar delivered a one-day boost to beaten-up DISH stock. Now investors are wondering what's next for the merged companies, both controlled by telecom pioneer Charles Ergen.
As its pay-TV business continues to dwindle, Dish wants to develop another revenue stream in 5G wireless networks. The move could remake the company, and the EchoStar deal will help Dish finance it.
Investors initially applauded the move, as DISH stock surged 9.5% on the Aug. 8 merger announcement. But it's still down 40% in 2023.
In a conference call with analysts, Ergen, who serves as executive chairman of both firms, said there's much to do.
"We have a lot of opportunities and options," Ergen said. "I think all I can say is we're better off financially today than we were yesterday — (now) as a joint company — but we still have wood to chop, right? And we're cognizant of that."
DISH Stock: Wireless Strategy
The rationale for the all-stock deal is clear, Raymond James analyst Ric Prentiss said in a recent note to clients.
"The balance sheet at DISH is weak (highly levered and facing tough refinancings) versus strong at SATS (negative net debt including $1.7 billion of cash at March 31)," Prentiss said. "The base pay-TV business at DISH has been retreating and burning cash while building a new nationwide 5G wireless network that needs funding."
Dish shareholders will own 69% of the combined company. Existing EchoStar shareholders will own the rest.
Ergen spun out EchoStar from Dish in 2008. Meanwhile, Dish acquired Sprint's Boost-branded prepaid wireless business in 2020.
The big question is whether Ergen aims to be a long-range player in the wireless phone industry. AT&T, Verizon Communications and T-Mobile US all are further ahead in building out 5G networks.
Speculation Amazon.com could sell wireless services under its brand recently pressured T stock and others. VZ stock has retreated 16% in 2023. Amazon's recent second-quarter results beat expectations.
Cloud Builds Better 5G Network?
Ergen insists Dish's network will cost less to operate. And its 5G network will have capabilities that AT&T, Verizon and T-Mobile cannot match, he adds.
The reason is the operating system is based on cloud computing and open-standard radio equipment. Dish connects all of its 5G network hardware and management software through cloud giant Amazon Web Services, part of Amazon. In addition, Dish recently agreed to sell Boost services at Amazon's e-commerce website.
But neither Dish nor Amazon will subsidize the cost of smartphones that consumers buy. That's a key marketing tactic of AT&T, Verizon and T-Mobile.
At TD Cowen, analyst Gregory Williams maintains an "outperform" rating on Dish stock. Williams expects Dish to focus on hitting more 5G network build-out goals set by the Federal Communications Commission. The FCC approved Dish's purchase of 5G radio spectrum with conditions.
"We believe Dish will build a bare-bones 5G network to reach 2026," Williams said in a recent note. "Dish simply needs to get to 2026 when regulators will allow Dish to sell its pieces or all of its valuable spectrum, or sell the company outright, to the Big 3 (AT&T, Verizon and T-Mobile) if necessary."
He added: "In the interim, Dish can use creative financial engineering with many underappreciated options, of which this (EchoStar) announcement is one."
DISH Stock: Wholesale Network Play
While Boost currently sells 5G services for $25 monthly, Ergen on Aug. 8 told analysts that he doesn't expect Boost to be the only tenant on its 5G network. Dish plans to sell network capacity to other companies.
"We're designed to have our cake and eat it, too," Ergen said. "We're designed primarily as a wholesale network. It's available for other people to ride on our network. So it's designed for wholesale, whether we have wholesale customers or not; you'll have to stay tuned, but it's designed for wholesale."
Some Dish stock bulls speculate Amazon could be an anchor tenant for the 5G wireless network and lease capacity under a wholesale agreement. Amazon could use the 5G bandwidth for video streaming or cloud gaming, bullish investors say.
Dish reportedly has talked to others, such as Microsoft and Alphabet's Google. GOOGL stock has jumped 46% in 2023.
Then, there's the "enterprise" 5G business market. One of the new features of 5G networks is that bandwidth can be sliced up to provide private communications. Enterprise applications are expected to emerge in smart factories, autonomous vehicles, drones, remote health care services and other areas.
Meanwhile, Dish told analysts that the EchoStar deal will enable it to raise an additional $10 billion of spectrum-backed debt. On the other hand, Dish said it will spend just $2 billion in 2024 and 2025 to build its 5G network to meet the 2025 FCC conditions.
Option To Buy T-Mobile Spectrum
One clue to Dish's long-range plans could be whether it decides to buy additional 5G spectrum in the 800 MHz range from T-Mobile. It has an option to do so. The deadline is Aug. 30. TMUS stock has dipped 1% in 2023. Shares fell 1.3% to close at 8.16 on Thursday.
Craig Moffett, a longtime telecom analyst at SVB MoffettNathanson, holds a "market perform" rating on DISH stock. In a report, he noted that the pay-TV business is shrinking fast as Dish loses subscribers.
"The 5G network isn't close to being ready for prime time," Moffett said. "The legacy businesses that were to fund the transition are collapsing faster than feared. And the capital markets, both debt and equity, are closed to Dish."
At Morgan Stanley, analyst Benjamin Swinburne also is cautious.
"Deal or no deal, we think DISH equity remains a call option on its wireless strategy, the cost and ability to finance that strategy and its ability to execute," he said in a report. "The benefits of this merger to EchoStar are less clear to us. For DISH it incrementally helps reduce its financing burden. A significant burden, however, remains."
Lastly, speculation that Dish could merge with the biggest satellite TV provider, privately held DirecTV, remains. AT&T spun off DirecTV, a move that impacts how much free cash flow it generates.
Dish Network is among 5G stocks to watch.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
