Last Sunday, I noted that while Ergen was a potential bidder on Clearwire’s (CLWR) 2.5 GHz spectrum, it seemed unlikely given the fact that Sprint would still own a majority stake in CLWR and that governance issues would make this a very messy fight that would potentially tie up DISH assets when they are needed for its own network deployment and for a potential H Block Auction bid. I also noted a lot of other issues that make a purchase by anyone other than Sprint less attractive — such as the cost of network buildout — that cast serious doubt on Crest’s valuation of CLWR’s spectrum at $30 billion.
48 hours later, Ergen makes a bid for CLWR valuing CLWR at at $3.30 a share (a reasonable enough premium over Sprint’s offer to require serious consideration). Mind you, nothing in the bid (what details there are can be found here) contradicts anything I said previously. As noted by CLWR in it’s press release, the proposed deal comes with a bunch of conditions and caveats that reflect Sprint’s ownership and the cost of building out a network that would integrate with Ergen’s AWS-4 spectrum. Which naturally raises the question of why Ergen decided it was worth it to make the bid anyway. Making a serious tender offer — even if you think it will ultimately be rejected — is a non-trivial process that incurs expense. Before dismissing this as mere payback for Sprint’s (successful) push to amend the AWS-4 rules to protect H Block (creating delay in the approval and potential issues for deployment), it is worth considering what the potential upsides are to DISH that justify the cost.
Oh yeah, I should also talk about some consumer stuff and broader stuff as well. Horse race is all well and good, but there are a lot of industry folks that do that better than I do.
More below . . .
First, let me emphasize something from a consumer perspective. We should want both DISH and Sprint to succeed in their plans to create competitive and potentially disruptive networks. While this sometimes requires striking a balance among competing interference concerns, as happened with H Block v. AWS-4, the best policy from the perspective of promoting competition is one that enables both networks to deploy rather than chooses between them. I further note that the fact that Ergen is investing time and effort into a bid for CLWR — for whatever reason — should give greater confidence to those of us who think DISH actually wants to make a terrestrial wireless play rather than simply speculate in spectrum.
Unfortunately, “can’t we all get along” is so rarely the philosophy of the business world. But it should frame the regulatory response. The FCC resolution of the various regulatory challenges needs to remain focused on promoting multiple competitive entrants rather than betting all on Sprint or all on DISH (which is the balance the FCC tried to strike with H Block/AWS-4).
That said, on to the horse race analysis.
So What Happens Now?
As indicated in the CLWR press release, CLWR has a special committee to examine takeover offers and protect the minority shareholders. CLWR’s Committee has determined that there is enough substance to the new offer to require further discussions, but indicated that it regards to the Sprint offer as still superior. On the negative side of the DISH offer, it would impose a bunch of build out obligations on CLWR while cutting it off from the Sprint financing otherwise available to it. It is also unclear how the company makes money if Sprint is hostile, given Sprint’s existing contractual agreements with CLWR and majority stake in the company.
What About the FCC Proceeding?
In theory, this does not impact the FCC proceeding, although I am sure that both DISH and Crest will urge the FCC to put the proceeding on hold until the corporate fight gets worked out. Sprint will respond that the FCC has a legal obligation to consider only the transaction before it, and as long as all three corporate entities involved in the license transfer want the application to go forward, then the FCC is legally bound to ignore any possible alternative bidders. Precedent generally favors Sprint on this.
As a practical matter, however, the FCC staff are human beings like anyone else and have no interest in wasting their time on stuff that might get tossed out the window. There is always lots of other stuff to work on, and if it looks like CLWR might actually accept DISH’s offer it is entirely likely the FCC could put this on the backburner to wait and see what happens. Furthermore, if AT&T does decide to crash the party and weigh in against the deal, it could get ugly.
Countering this pressure is the fact that the Softbank investment in Sprint is manna from Heaven for the FCC. It totally validates the FCC’s wireless competition policy — particularly its handling of AT&T/T-Mo and VZ/Spectrumco — by showing that the wireless market has become sufficiently competitive to attract major investment again. Nor could the FCC ask for a better poster-child for disruptive competitive investment than Masayoshi Son, with the possible exception of Charlie Ergen. So the FCC really wants to see this get through.
Nor does the DISH bid help Crest terribly much. Leaving aside my feelings about the legal basis for their Petition, DISH’s bid does not provide much support for Crest’s valuation. DISH’s bid $3.30 does not represent that big a premium for the spectrum, especially when deducting for the additional expense CLWR would incur to build out the network to accomodate sharing DISH’s AWS-4 spectrum. It may help Crest in its state court claims, but I am not enough of a corporate expert to evaluate that.
Taking all this together, I don’t think the DISH bid as it stands will delay the FCC processing of the license transfer. If DISH substantially sweetens its offer so the the CLWR super committee reverses its evaluation and recommends accepting a DISH deal, that would potentially change things. But for now, I expect the FCC to continue to move this along. As a last resort, if the CLWR stuff got too messy, the FCC could approve Softbank’s acquisition of a controlling interest in Sprint separately while the CLWR portion remains pending. But even this is unlikely unless it looks more plausible that CLWR will accept DISH over Sprint.
So What Is Ergen Up To With The Offer?
Given that the offer is serious enough to be credible and trigger a requirement that CLWR negotiate with DISH, but not so overwhelming as to require Sprint to up their offer, a number of folks have speculated that Ergen is not seriously trying to close a deal with CLWR. As I noted many years ago when Ergen made a major play in the 700 MHz auction (and ultimately captured the E Block), is Ergen a Brave Little Toaster or a stubborn idiot? Highly successful entrepreneurs like Ergen get that way because they see the opportunities nobody else has noticed and or that others have dismissed as too hard or not lucrative enough. This does not always pan out (e.g., Ergen’s attempt to use Blockbuster to get into content somehow). But Ergen grew DISH from nothing into one of the largest MVPDs in the country despite the fact that cable was already a ‘mature’ market (with 65% penetration) when he got access to programming through the 1992 Cable Act.
I have some thoughts on possibilities. Many of these are not mutually exclusive, and also represent a range of possible favorable results.
Payback time! The most obvious motive is that Ergen is pissed about Sprint demanding that the FCC modify the AWS-4 rules to protect H Block and this is payback. That is certainly consistent with Ergen’s character. Nor is it entirely irrational. It is helpful to a company to gain a reputation for punishing people who mess with it so that potential opponents in the regulatory sphere (and elsewhere) will think twice before weighing in against DISH in the future. Sure, making an offer burns up a couple of million dollars in legal time and financial commitments, so it’s non-trivial and may not be worth the cost if that is the sole reason to do it. But given Ergen’s character and reputation, payback can’t be ruled out as the dominant motive.
Ergen actually wants to buy out CLWR. On the other end of the spectrum (as it were), Ergen may be genuinely interested in getting a stake in CLWR and is simply being canny about negotiating. By forcing CLWR’s committee to come to the table, Ergen can require them to come up with specific objections and can tailor an offer to match. A more generous offer at this stage might result in DISH paying more than it otherwise would have to pay. For the reasons I’ve given before about the problems of working with CLWR against the active opposition of Sprint, I assign this a very low probability. But again, given Ergen, it can’t be entirely ruled out.
A deal with Sprint/3GPP Insurance. The most favored probability among analysts who don’t favor the “payback” theory is that Ergen wants something else from Sprint and that this is a bargaining chip in that fight. The simplest possibility is what I call “3GPP Insurance.” As folks may recall, when the FCC decided to protect H Block by modifying DISH’s use of the 5 MHz closest to the H Block frequencies, DISH pushed back that any modification would require re-opening the 3GPP standard previously adopted for the AWS-4 band. DISH also accused Sprint of seeking to manipulate the 3GPP process to delay development of a standard so as to foreclose DISH from building a rival network. Sprint, needlessly to say, totally denied this.
Regardless of whether Sprint acted out of concern for interference with H Block or anticompetitive animus, it would definitely speed things along for the modification of the 3GPP standard if Sprint supported whatever proposal DISH makes. Ergen’s message here may be: “see how serious I am? Mess with me at 3GPP and I will seriously screw up your CLWR deal.”
Other deals range from a full-blown partnership to develop AWS-4 with DISH to some kind of network sharing or spectrum sharing arrangement. Sprint has expressed interest in the past in such deals without pressure from Ergen, but both Ergen and Son are strong personalities who would want to be in charge of any such partnership. This could easily be a ploy by Ergen to improve his bargaining position. Such a deal would be unlikely to raise any regulatory issues. Sure, everyone would rather see two potentially disruptive competitors than one. But given that it was only a year ago that the consensus was we were sliding unstoppably to duopoly, the FCC and DoJ will cheerfully settle for one robust competitor (especially if it also helps competition on the MVPD side) rather than two.
It’s kinda hard to tell where things go from here, given that Ergen is a major wildcard and no one knows what Son may be thinking. From a regulatory side, neither DoJ nor the FCC has any reason to favor DISH over Sprint (or Sprint over DISH). The biggest incentive the regulators have here is to get these applications approved quickly so they can point with pride about how the policies of the last 4 years have fostered renewed competition. OTOH, there is certainly a potential for things to get messy with DISH and Sprint squabbling and AT&T possibly lurking in the wings. From my standpoint, the best result is to see DISH and Softbank more focused on deployment and disruptive business plans than on acquisitions, which only happens once the license transfer stuff gets resolved.
Stay tuned . . . .