Fitch: DISH Bid for Sprint Laced with Risk and Reward

NEW YORK--()--DISH Network Corporation's (DISH) $25.5 billion bid for Sprint Nextel Corporation (Sprint) would create a compelling combination of assets, spectrum, and service offerings that could uniquely position the combined entity with a stronger overall competitive position, according to Fitch Ratings. While acknowledging that an agreement is far from certain, we view the proposed merger positively from a strategic standpoint.

DISH's proposal marks the final stages of the evolution of its wireless strategy. A combined company would be better enabled to provide network connectivity across multiple platforms and devices to capitalize on growing demand for video-centric, high-speed data services in both a fixed in-home or mobile environment.

The centerpiece of the proposed transaction would be the spectrum portfolio of the combined companies, which would include approximately 230 MHz of spectrum in high, mid, and low bandwidths. This spectrum position could enable the company to provide unique video and high-speed data services to subscribers although uncertainty exists whether the U.S. Federal Communications Commission would require any material spectrum divestures.

However, we believe there is substantial risk to realizing expected cost and revenue synergies. We expect a combined DISH/Sprint would have significant network capital investment requirements over a multiyear period beyond current expectations in order to deliver a robust video, wireless data, fixed broadband, and mobile video solution that DISH outlined in its proposal. This strategic investment would require a significant expansion of the number of cell sites to increase network capacity in the large urban areas to address the increased demand for existing and new data services. In addition, further investment would be necessary across the current network to permit the use of DISH and Clearwire spectrum. While the investment could potentially improve competitive position by allowing the combined companies to increase the value of service offerings to consumers, it also carries material long-term execution risk via successfully building and integrating the two.

We believe elevated execution and integration risks along with higher debt levels associated with the transaction will likely have negative rating consequences for DISH and would be neutral to potentially negative to Sprint's credit profile, particularly if a substantial amount of secured debt is placed ahead of unsecured bondholders that do not have change of control provisions. DISH's credit profile has weakened considerably during the course of 2012 due to inconsistent operating performance and increasing debt levels limiting the company's financial flexibility at the current 'BB-' issuer default rating level.

DISH has amassed approximately $9.5 billion of cash and marketable securities and would require an additional $9.3 billion of debt financing to fund the merger with Sprint. DISH claims the combined company generated approximately $9.4 billion of pro forma EBITDA, including Clearwire and $1.8 billion of run-rate cost synergies during 2012, and would have approximately $43.8 billion of net debt. We estimate pro forma leverage of 5.7x and 4.7x calculated on a gross and net debt basis as of Dec. 31, 2012.

DISH's proposal includes $25.5 billion of total consideration, consisting of approximately $17.3 billion of cash and $8.2 billion of DISH common stock. Sprint shareholders would receive $4.76 in cash and 0.05953 DISH shares per Sprint share. Sprint shareholders would own 32% of the combined entity. The transaction would be subject to typical regulatory review if accepted by Sprint.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
David Peterson, +1 312-368-3177
Senior Director
Corporates, Telecom and Cable
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Bill Densmore, +1 312-368-3125
Senior Director
Corporates, Telecommunications
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
David Peterson, +1 312-368-3177
Senior Director
Corporates, Telecom and Cable
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Bill Densmore, +1 312-368-3125
Senior Director
Corporates, Telecommunications
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com