Dish, T-Mobile Talks Could Indicate Sale To Verizon

In a report published Thursday, Citigroup analyst Michael Rollins discussed the potential DISH Network Corp (NASDAQ: DISH) merger with T-Mobile US Inc (NYSE: TMUS), noting that the purchase price and mix of consideration are still unresolved.

Rollins noted that the timing of the media reports is "surprising" as it immediately followed T-Mobile's analyst meeting in Denver in which the company hosted the buy-side and sell-side community. Nevertheless, the analyst stated that there are two options for Dish Network: Acquire T-Mobile or sell itself to Verizon Communications Inc. (NYSE: VZ)

T-Mobile's valuation currently stands at $31 billion and trades at 6.3x Rollins' 2016 OIBDA while shares would be valued at $45 under a 7x forward multiple. The analyst stated that if allocated 50 percent of the cost synergies of $1.8 billion, T-Mobile shares could have a further upside potential and be worth nearly $53 per share.

However, Rollins said that the "most likely option" for Dish is to sell itself to Verizon for four reasons:

1. Verizon has a spectrum shortage compared to rivals and Dish's spectrum portfolio could narrow Verizon's deficit.
2. DBS (direct broadcast satellite) firms can shift to IP video and "dramatically" increase the magnitude and duration of video cash flows.
3. If AT&T Inc. (NYSE: T) acquires DIRECTV (NASDAQ: DTV), Verizon would be at a disadvantage competing against AT&T's national wireless and video footprint.
4. Verizon may be in the early stages of exiting the terrestrial consumer market.

Bottom line, Rollins expects Dish to continue exploring its options to deploy its spectrum through mergers and partnerships but is likely to end up selling itself to Verizon.

Analyst Ratings And Price Targets

• Shares of Dish Network remain Buy rated with an unchanged $94 price target.
• Shares of T-Mobile remain Buy rated with a price target raised to $46 from a previous $43.
• Shares of Verizon remain Neutral rated with an unchanged $51 price target.