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(B)(N) DISH Network Corporation

April 15, 2013

Deal Book. The DISH Network Corporation bought several billion dollars of new  bandwidth in the last several years, and all that it needs now is more customers. Enter the Sprint Nextel Corporation which has 50 million customers, and 40,000 employees, but it is also being eyed by the Japanese telecom, Softbank Corporation, which offered $20 billion for just 70% of the Sprint Nextel shares outstanding in a deal that is supported by management but has not yet obtained shareholder approval; Sprint shareholders would also end up owning 30% of the combined company (Reuters, April 15, 2013, Dish tries to trump SoftBank with $25.5 billion Sprint offer).

Today’s DISH (offer) is $25.6 billion for all of the shares of Sprint Nextel, but consists of $4.76 per share in cash and 0.05953 shares in DISH stock for each Sprint share which, at the current price of $37 for a DISH share works out to about $7 for a Sprint Nextel share which is, not surprisingly, also trading at $7 today. However, we need to sharpen our pencils because 0.05953 shares of DISH stock is not the same as $2.24 in cash ($7 less $4.76) even if we try to sell our newly minted DISH shares for $37 immediately.

The Risk Price (SF) relaxes the tension between “risk averse” investors – we want our money to be safe and to obtain a hopeful return above the rate of inflation (which is just another kind of “safety”) – and “risk seeking” investors, who believe that there might be more, and are willing to bid the stock price up, but are also concerned not to lose their money – we’re not suggesting that “risk seeking” is necessarily “reckless”. Under those circumstances, the Risk Price (SF) is reliably estimated as $29 (instead of $37) per share so that the DISH offer is really only worth $6.50 per share. (For more information, please see our Posts, The Price of Risk, August 2012, and the Nash Equilibrium & Its Stock Price, October 2012.)

The DISH Network Corporation has a market value of $7.5 billion at today’s prices, $17 billion in total assets and a shareholders equity of $37 million, down from $170 million in 2012 but up from negative (-$400 million) in 2011, and, so, is mostly funded by debt already, and it’s now proposing to pay about $500 for each Sprint Nextel customer ($25 billion divided by 50 million subscribers) but it is also hedging its bets by tying the benefits of customer retention to its own future stock price. The indicated stop/loss due to volatility is minus ($3) per share, and we can focus on our own capital retention by either setting the stop/loss at $34, or by buying the June put at $36 for $2.05 today, and selling or shorting the June call (against our long position) at $38 for $1.95 per share today, so that for a net cost of $0.10 per share ($2.05 less $1.95), we can wait and see how all this works out for the next several months and still get between $36 and $38 for our stock. We note in passing that the June call at $37 sells for $2.40 today so that we could earn $0.35 per share today and still be assured of at least $36 in June, or $37 in the event of even more investor exuberance. They can “call” us if they like.

Exhibit 1: (B)(N) DISH DISH Network Corporation – Risk Price Chart

(B)(N) DISH DISH Network Incorporated

The DISH Network Corporation provides a direct broadcast satellite subscription television service in the United States.

(Please Click on the Chart to make it larger if required.)

Both the DISH Network Corporation and Sprint Nextel have been in the Perpetual Bond™ since June 2012 (Red Line Stock Price (SP) above the Black Line Risk Price (SF)); we might have thought that a DISH offer would have been much “tastier” just six months ago when Sprint Nextel was trading at $3 (please see Exhibit 2 below).

Exhibit 2: (B)(N) S Sprint Nextel Incorporated – Risk Price Chart

(B)(N) S Sprint Nextel Corporation

Sprint Nextel Corporation offers a range of wireless and wireline communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers.

(Please Click on the Chart to make it larger if required.)

We’ve also “collared” our interest in Sprint Nextel; the estimated downside due to ambient volatility is minus ($1) per share, but the May put at $7 is selling for $0.21 per share whereas the May call at $7.50 against our long position can be sold for $0.11 per share, so that for a net cost of $0.10 per share today, we can “put” the stock in May for no less than $7, but might be called at $7.50 if there are higher offers to come as the play goes on.

Exhibit 3: (B)(N) Softbank Corporation – Risk Price Chart

(B)(N) SFTBF Softbank Corporation

The Softbank Corporation is head quartered in Tokyo and  provides telecommunication services. It is Japan’s third largest mobile phone carrier and also operates ADSL (Asymmetric Digital Subscriber Line) and fiber optic high-speed Internet connection, e-Commerce businesses, and Internet based advertising and auction businesses.

(Please Click on the Chart to make it larger if required.)

Softbank has a market value of about $52 billion, total assets of $64 billion and a shareholders equity of $13 billion. None of these companies – DISH, Sprint Nextel, or Softbank – has ever paid a shareholder dividend. We can only make money on these stocks by buying and selling them to each other, or , as investors, to ourselves.

The competition – Verizon and AT&T – is much better heeled; they pay dividends and are also trading above the Risk Price (SF) (please see Exhibit 4 and 5 below).

Exhibit 4: (B)(N) Verizon Communications Incorporated – Risk Price Chart

(B)(N) VZ Verizon Communications Incorporated

Verizon Communications Incorporated is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies. Its two business segments are Verizon Wireless and Wireline.

(Please Click on the Chart to make it larger if required.)

Verizon has a current market value of $145 billion, total assets of $225 billion and shareholders equity of $33 billion; it’s paying a current dividend of $0.515 per share per quarter, or $6 billion a year to its shareholders for a current yield of 4%.

Exhibit 5: (B)(N) T AT&T Incorporated – Risk Price Chart

(B)(N) T AT&T Incorporated

AT&T Incorporated, through its subsidiaries and affiliates, provides wireless and wireline telecommunications services in the United States and internationally.

(Please Click on the Chart to make it larger if required.)

AT&T, the mother of all phone companies, has a market value of $210 billion, total assets of $270 billion and shareholders equity of $93 billion. It’s paying a quarterly dividend of $0.45 per share or $10 billion per year to its shareholders for a current yield of a staggering 4.7% even as the stock price is up by more than 20% in the last year.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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