Dish Network Corp (NASDAQ:DISH) threw a wrench into Softbank Corp’s plan to buy Sprint Nextel Corporation (NYSE:S) by offering a higher price for the company. Softbank had planned on taking over 70% of Sprint Nextel in a deal valued at $20 billion. The offer from Dish Network Corp (NASDAQ:DISH) values the entire company at $25.5 billion. Analysts and merger arbitrage traders are expecting Softbank to raise its offer and not walk away.
Telecom industry shakedown
The other big news in the industry includes the proposed merger of Deutsche Telekom’s T-Mobile and MetroPCS Communications Inc (NYSE:PCS). If you’ll remember, AT&T Inc. (NYSE:T) tried purchasing T-Mobile back in 2011 but antitrust challenges led to the falling apart of such a deal.
Verizon Communications Inc (NYSE:VZ) could soon be tied up in its own buyout saga. There was previous speculation that that Verizon Communications Inc (NYSE:VZ) could team up with AT&T to buy Vodafone Group Plc (ADR) (NASDAQ:VOD), where Verizon Communications Inc (NYSE:VZ) would acquire the 45% stake Vodafone Group Plc (ADR) (NASDAQ:VOD) currently owns in its U.S. operations.
Billionaire David Einhorn, a Vodafone shareholder, has noted that “with Verizon Communications Inc (NYSE:VZ)’s increasing dependence on Verizon Wireless, it wouldn’t surprise us [Greenlight Capital] if Verizon decided to buy all of Vodafone to gain full ownership of Verizon Wireless.”
While Sprint might be the growth story of the industry, Verizon is one of the stable dividend-paying operators in wireless communications, with pretty impressive growth opportunities of its own. What’s more is that I love Verizon more than AT&T.
Verizon pays a 3.9% dividend yield and only has a beta of 0.45. The other big plus is that fact that analysts expect Verizon to grow EPS by an annualized 8% over the next five years, compared to AT&T’s 5.5%.
AT&T also fell behind Verizon when it failed to purchase T-Mobile. Verizon has been actively snatching up spectrum thanks to its purchases of cable spectrum from Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC). The deals could easily double Verizon’s capacity and allow the company to provide services at a higher speed.
The cable spectrum airwave licenses were initially bought by the cable companies in a 2006 government auction for $2.4 billion, but sold to Verizon when their plans were abandoned to build a high-speed wireless networks to compete with Verizon and AT&T.
The Sprint-Dish deal
The Dish Network Corp (NASDAQ:DISH) offer values Sprint Nextel at $7 a share. That represents a 12% premium to where Sprint Nextel has been trading in recent days. Dish Network Corp (NASDAQ:DISH) says that its offer is 13% higher than Softbank’s.
Dish Network CEO Charles Ergen says that a “Dish-Sprint merger will create the only company that can offer customers a convenient, fully integrated, nationwide bundle of in-and-out-of-home video, broadband and voice services.” Their plan is to combine Dish’s broadband and television packages with Sprint Nextel’s cellphone business.
This differs with Softbank’s game plan, which is to provide Sprint Nextel with a cash infusion to better compete with Verizon and AT&T. Sprint Nextel’s plan would be to use Softbank’s cash to buy cellphones in bulk at a lower price.
Billionaires John Paulson and Leon Cooperman have voiced support for Dish’s proposal. These two hedge fund managers also happen to be Sprint’s two-largest hedge fund shareholders (by shares).
Paulson owns 127 million shares and Cooperman 56 million; interestingly enough, Leon Cooperman is also one of Dish Network’s top shareholders, owning over 3.6 million shares, which is about 2.5% of his 13F portfolio.
Battle of billionaire CEOs
Dish Network’s Ergen has already started the war of words with Softbank CEO Masayoshi Son. Ergen said of his rival:
I think we have a lot of in common. We are two individuals who saw the value in Sprint and Clearwire. His vision is 300 years old and mine is three years long.
That pretty much sums up Charlie Ergen, who has been dubbed “the most hated man in Hollywood” for his bare-knuckle tactics. Ergen describes his approach as follows:
I may be the only CEO who likes to go to depositions. You can live in a bubble, and you’re probably not going to get a disease. But you can play in the mud and the dirt, and you’re probably not going to get a disease either, because you get immune to it. You pick your poison, and I think we choose to go play in the mud.
Softbank’s Son isn’t known to back down from a fight. He’s known in Japan as that country’s Bill Gates. He has built Softbank into Japan’s fastest-growing mobile provider, and his aim has been to make Softbank into a global player in mobile. An acquisition of Sprint Nextel would fulfill that ambition. Both men have a lot in common–both are self-made entrepreneurs, and neither one is likely to back down in the battle for Sprint Nextel.
A look at Dish Network and Softbank
Dish Network is the nation’s second-largest satellite company after DirecTV. The company has a market cap of approximately $16.7 billion. The stock trades with a forward P/E of about 15.3. Operating margins are around 13.9%. On the balance sheet, there’s $7.2 billion in cash and about $11.9 billion in debt. The stock is up 15.5% in the past year.
Of the analysts that follow the stock, three have it rated as a Strong Buy, seven a Buy, eight a Hold, and two an Underperform. The price targets for the stock range from $28 to $45, with $39 being the median target. The stock closed at $36.77 on the day Dish announced the proposed deal for Sprint Nextel.
Softbank has stakes in Yahoo! Inc. (NASDAQ:YHOO) Japan, Renren Inc (NYSE:RENN) in China, and Gilt in Japan. Its largest business is its mobile-carrier business after buying Vodafone Japan. It’s one of Japan’s three-largest wireless carriers, and for a long time had the exclusive license for iPhones in Japan.
Softbank has a market cap of approximately $47.6 billion. Operating margins are 22.4% and return on equity is 24.7%. On the balance sheet, there’s approximately $13.6 billion in cash and $33.6 billion in debt. The stock is up 49.7% in the past year.
Outlook for all three companies
In looking at all three companies, each one is a winner no matter the outcome. Sprint Nextel shareholders are going to get a higher price for their stock than they would have received only weeks ago. Investors looking for a solid dividend and low volatility should consider Verizon over AT&T.
Dish Network will be able to bundle its services if it buys Sprint Nextel. If Dish Network loses, it will have made Softbank pay more and Dish can possibly go after T-Mobile.
If Softbank wins, Masayoshi Son will have completed his vision of turning Softbank into a global company. If Softbank loses, they gain about $3.5 billion from currency hedges, a convertible bond and a breakup fee. So as investors, we can’t go wrong if we own all three.
The article The Telecom Wars Rage On originally appeared on Fool.com and is written by Marshall Hargrave.
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