The founder of DISH Network Corp (NASDAQ:DISH), Charlie Ergen, has always played the role of outsider, as he built his company into the #2 satellite television operator. Now he wants a bigger piece of the telecommunications market, bidding $25.5 billion for Sprint Nextel Corporation (NYSE:S), which follows on the heels of his $2.4 billion bid for Sprint’s network partner Clearwire Corporation (NASDAQ:CLWR). If successful, Dish’s combination with Sprint Nextel Corporation (NYSE:S) would form a company with a unique collection of assets and would upset Softbank’s bid to become a U.S. telecom power. So, is there a move for the small investor?
While Sprint is the #3 domestic telecommunications operator, it has been struggling financially due to a heavy debt load and the high costs of attracting subscribers. The company’s post-paid subscriber base fell for the fourth straight year in 2012, which was only partially offset by an increase in lower-margin, pre-paid subscribers. Like the rest of the industry, Sprint Nextel Corporation (NYSE:S) has also been losing traditional wireline customers, a perennially stable profit base for the industry’s players.
In FY2012, Sprint posted mixed results, with a 5% increase in total revenues and a 5% decrease in adjusted operating income. The company benefited from the popularity of smartphones and the correspondingly high-priced service plans, but subsidizing customers’ smartphone device purchases hurt the bottom line. More importantly, Sprint Nextel Corporation (NYSE:S)’s free cash flow turned negative in 2012, indicating that a capital infusion from a well-funded partner was becoming a necessity.
Meanwhile, DISH Network Corp (NASDAQ:DISH) has been struggling to secure revenue growth, as its core satellite television market approaches saturation. It is also finding its profit margin squeezed by both higher-priced programming content and the cost of competition from newer online platforms. While Dish has moved into the broadband internet segment in selected markets around the country, the results have had a marginal effect on its cumulative profitability.
In FY2012, DISH Network Corp (NASDAQ:DISH) reported fairly weak financial results, with flat revenue growth and a 19.4% decrease in adjusted operating income. Its profit margin slipped badly, due primarily to the continuously rising cost of programming, as well as higher subscriber acquisition costs. Dish has also been spending some quality time in the courtroom, as the broadcast networks have panned the company’s Hopper set-top box that allows customers to record programming for delayed viewing and skip past commercial breaks.
Sprint Nextel Corporation (NYSE:S) fits well into DISH Network Corp (NASDAQ:DISH)’s plans to become a diversified telecommunications company, capable of delivering a valuable suite of video, internet, and voice services on a nationwide basis. The company has already spent heavily on the acquisition of wireless spectrum, with purchases of DBSD North America and Terrestar for $2.8 billion in 2012. The acquisition of Sprint’s network would allow Dish to expand beyond broadband service and create value-added, bundled packages of services. In addition, the company estimates up to $11 billion in cost savings from a completed merger of the companies.
Of course, Dish still has an open offer to acquire Clearwire Corporation (NASDAQ:CLWR) for $2.4 billion, trumping Sprint’s December 2012 agreement to purchase the network operator for $2.2 billion. Sprint has already invested significant resources in the company, including paying $926 million for unlimited access to its network through the end of 2013. Sprint also accounts for the vast majority of Clearwire’s wholesale customer base, as other telecom providers have chosen to build their own 4G networks.
In FY2012, Clearwire Corporation (NASDAQ:CLWR) reported another year of heavy losses, as revenues from its predominantly wholesale customer base couldn’t cover the costs of expanding its 4G network across the country. The company continues to run at negative operating cash flow, relying on its partnership with Sprint Nextel Corporation (NYSE:S) to fund its capital needs. Obviously, Clearwire is more a collection of assets than an operating business and needs to be folded into a larger diversified telecommunications business.
DISH Network Corp (NASDAQ:DISH) has brought up national security concerns, in the hopes of finding sympathetic ears in Washington, as it tries to wrestle Sprint from the arms of Japan-based Softbank. Regardless, the company seems likely to prevail, given its superior offer and the potential cost synergies from the deal. However, investors might want to sit on the sidelines until the outcome of this corporate tussle becomes a little bit clearer.
The article Charlie Ergen Goes for Broke originally appeared on Fool.com and is written by Robert Hanley.
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