Description

DISH NetworkCo Investment Write-Up – 2/6/23

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Recommendation: purchase DISH NetworkCo 3 3/8^th convertibles due 2026 at market price (67c/16% YTM) for a base case 27% one-year IRR (price target 85c on 800bps fwd spread over 5yr treasuries).

Investment Thesis: DISH (“NetworkCo”, “the company”) is on the verge of hitting their 70% coverage buildout requirement for their highly valuable AWS-4/H-Block spectrum and fulfilling their nationwide 5G coverage commitment by June 2023. Upon completion, DISH will own its spectrum free from the risk of possible forfeiture to the FCC, unlocking further spectrum-backed debt financing opportunities leading to a path to refi. The 2026 convertibles are attractive as a low dollar-price unsecured claim backed by spectrum value with upside optionality if the company executes on their 5G network business plan.

Detailed Summary and Background:

• DISH is attempting to become the fourth major wireless carrier in the US. As a condition for approving the TMUS/Sprint merger in April 2020, the FCC mandated TMUS sell its Boost prepaid brand to DISH and that DISH use its portfolio of spectrum to create a fourth wireless competitor.
• DISH estimates the total network will cost $10bn of CAPEX to build (to-date, ~$4bn has been spent)
  • The company has a significant cost advantage building 5G from the ground-up by implementing cloud-based ORAN infrastructure upfront without legacy carrier/decommissioning costs from 4G
  • Current Boost customers roam on a TMUS MVNO. As DISH finishes its network, it can balance traffic between the two networks – providing satisfying coverage without fully burdening costs on a per sub basis
• As of Dec 31, DISH has started construction on >15k 5G sites which, if completed, provide coverage to over 60% of the US population. At the pace of 1,000 sites per month they are on track to hit the 70% coverage target by June 2023
  • DISH’s spectrum portfolio is one-of-a-kind, amassed over decades through auctions and secondary sales. The portfolio is a combination of high-value paired mid-band spectrum (crucial for any 5G application, offering high speeds at low latency), high-coverage low-band (including 600MHz spectrum which we discuss below), and option-value high band (12GHz, under review by the FCC for 5G FWA repurposing)
  • The convertibles are well covered on any conservative estimate of spectrum value. Further, reaching the buildout requirement will allow DISH to raise more debt at a cheaper cost against those assets, de-risking funding needs
• The company recently raised $3.5bn of spectrum-backed bonds to fund their buildout CAPEX. We believe this gives them runway until early 2024 to show signs of progress on monetizing the network
  • After the raise, DISH’s comments at a recent conference would indicate $1-2bn of debt need to finish the build
  • DBS maturities post- March are largely self-fundable - $2bn comes due in Nov 2024 and another $2bn in Jul 2026. DBS run-rate generates $300-400mm of cash per quarter net of their interco tax payments to NetworkCo
• An investment in the convertibles at a low dollar price capitalizes on the value of DISH’s spectrum without necessarily taking the risk that the network will be profitable early on
  • Markets are rightfully skeptical that DISH will be able to attract retail/enterprise customers as the 4^th major carrier
  • With the equity trading far below the $65 strike, the converts have an attractive yield for an unsecured claim on DISH’s asset value – the realization of which is imminent
• Base case is that DISH finishes phase 1 of the build by this year and has a functioning network by 2026, at which point the converts are refinanceable with new convertibles issued at a lower strike

Valuation Backup:

• Our conservative estimate of DISH spectrum value is $50bn vs $29bn at cost.
  • Assuming the company needs to raise an incremental $4.5bn in spectrum-backed debt to fund the buildout, LTV through the convertibles is only ~44%.
  • At cost basis for the spectrum, LTV is ~73% pro forma for new debt needs.
• DBS is now effectively being run separate from the NetworkCo and has a $7bn intercompany loan to NetworkCo secured by the 3.45GHz spectrum. The intercompany comes due after the convertibles in 2026 and the company can tap further secured capacity at DBS if they need to. We conservatively value DBS at 4x implying solvency with the value of the intercompany.

Risks/Market Misconceptions:

• There are no possible buyers for DISH’s spectrum and even if so, it will not fetch the same prices it did at auction.
  • DISH hoarded spectrum for years without monetizing – that all changed after TMUS/Sprint. With a more supportive FCC, DISH is well on its way to creating a usable network and can raise debt against those future cash flows.
  • The buyer universe for spectrum has expanded, not shrunk, in the 5G era. Cable, big tech, infrastructure funds, and legacy telcos have all participated in the last five major C-Band auctions. Of the carriers, TMUS has a 2-3:1 spectrum advantage over AT&T and VZ in C-Band and is eating share.
  • There are no FCC auctions for spectrum scheduled for the near future, with the agency opting to work with the DoD to identify further bands for private use instead. This increases the attractiveness of available spectrum on secondary markets.
  • Multiple additional use cases in the last five years – high-band for satellite, mid-band for FWA, etc. all require higher bandwidth than previously estimated at greater depths across more bands.
  • DISH’s 600MHz spectrum was independently appraised at $10bn, 62% higher than the price DISH paid at auction in 2017.
  • The FCC’s mandate is to create a fourth carrier. DISH is the only company with the necessary combination of bands, creating scarcity value should DISH fail in their mission and needs a buyer.
  • Should the market not have an appetite for a sale, DISH is also able to lease their spectrum after July 2025.
• DISH will suffer the same fate as Rakuten, overspending on a network without ever extracting economics.
  • The ultimate success and profitability of the network is more of an equity question than for 3-yr credit.
  • DISH is different from Rakuten in two key ways: 1) there are no spectrum auctions in Japan (poised to change in 2026), meaning Rakuten had to share usage of several bands leading to poor network quality / low value and 2) Rakuten had to upgrade from 4G to 5G and transfer an aging customer base, leading to massive cost overruns.
• DISH’s retail network won’t have successful customer economics competing against incumbents.
  • DISH can capture excess value today by switching Boost customers from MVNOs to their own network.
  • Incremental customers will cost a lot to acquire but company has telegraphed awareness of this and is pivoting harder into their enterprise strategy instead.
  • Investing in the credit is not a bet on the commercial viability of the network, but on bridging the funding gap.
• Numerous contingent liabilities that could significantly increase the size of the funding gap.
  • Digging into the pieces, all are low probability events on a case-by-case basis.

Catalysts:

• DISH announces that they are clear of FCC requirements by June 2023 and owns spectrum without forfeiture risk.
• Any incremental color / revenue momentum on the enterprise network business.
• New raises of spectrum-backed debt at lower costs of capital, de-risking funding needs.

Exhibits:

Catalyst

• DISH announces that they are clear of FCC requirements by June 2023 and owns spectrum without forfeiture risk.
• Any incremental color / revenue momentum on the enterprise network business.
• New raises of spectrum-backed debt at lower costs of capital, de-risking funding needs.