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Wireless spectrum is the key to Dish's $25.5B bid for Sprint

Dish and Sprint have complementary spectrum holdings that would make a marriage of the two companies a match made in heaven. But there are obstacles to getting the deal done.

CNET/Marguerite Reardon

Why is satellite TV provider Dish Network prepared to take on an enormous amount of debt and a potential bidding war with Japanese company SoftBank for Sprint Nextel? It's all about the spectrum.

Dish Network Chairman Charlie Ergen is known for being bold and taking risks. But no one in the wireless industry ever thought that he'd be gutsy enough to become the fifth national competitor in the wireless market.

Indeed, it seems that Ergen, who co-founded Dish, has no plans to go it alone in wireless. His plan to team up with Sprint and fortify the position of the third biggest wireless operator in the U.S. makes perfect sense. The answer lies in the companies' complimentary spectrum holdings.

On Monday, Dish submitted a merger proposal to Sprint Nextel that is valued at $25.5 billion. The bid puts Dish in direct competition with the deep-pocketed Softback from Japan, which announced in October that it planned to buy the carrier. While SoftBank may be in a better financial position to buy Sprint, Dish has a clear strategic need for a tie-up with Sprint, which could make a marriage between the two companies a match made in heaven.

Complementary spectrum holdings

Why would this be such a great match? The biggest reason is, from a spectrum perspective, the companies fit very nicely together.

Over the years, Dish has amassed about 45 Mhz of wireless spectrum that in the 1980s had been set aside for satellite telephone use. In December, the Federal Communications Commission repurposed the spectrum, which under its previous classification was difficult to put to use, so that it could be be used to build a terrestrial wireless broadband network. Dish said it planned to build a next generation wireless broadband network using 4G LTE technology.

It just so happens that the former satellite telephone spectrum that Dish bought sits right next door to spectrum that Sprint has long been using to provide its own cellular service. Sprint also wants to get into the 4G LTE market. The company has already begun a massive network upgrading to reconfigure and re-use some of its existing wireless assets to build its 4G LTE network.

Combining Sprint's current spectrum holdings with the additional 45 Mhz of Dish's spectrum means that the companies could build a new wireless broadband network with very wide channels. Wider channels mean the companies would have more capacity to build the next generation wireless broadband network resulting in faster speeds for consumers and potentially more options for unlimited wireless use.

Dish can't go it alone

It's no secret that Dish has been looking for a partner in using its repurposed satellite spectrum. Dish bought the spectrum through a series of acquisitions on the cheap and went through a lengthy regulatory process to get the FCC to grant it permission to use the spectrum for a wireless broadband service. This instantly made the spectrum more valuable.

Still, many experts in the wireless industry have been skeptical that Ergen really wanted to build a new network on his own. Not only would such a network be expensive for Dish to build, but they note that the amount of spectrum Dish owns is not really enough to build a robust network to compete against the likes of AT&T and Verizon Wireless.

There have been rumors for several months that Dish wanted to sell its spectrum to AT&T, who a year and a half ago when the T-Mobile merger fell through, was desperate for more spectrum. There were also rumors that Dish may have been in talks to buy T-Mobile. And the company already put a bid out to buy spectrum from Clearwire, which is majority owned by Sprint.

But for various reasons, these other deals don't seem as perfect a fit for Dish at this moment in time as the deal with Sprint. For instance, AT&T is in the process of buying several smaller wireless companies to fill out its portfolio of lower frequency 700MHz spectrum. AT&T is also in the midst of deploying its own repurposed WCS spectrum.

As for T-Mobile, the company is in the process of trying to close a deal to acquire regional provider MetroPCS. What's more it seems that Dish's aim is to gain control of a wireless company, and it's unclear that T-Mobile's German parent company Deutsche Telekom would be willing to play along with those plans.

Verizon is a potential fit. But again, Dish would likely have to sell its spectrum to Verizon. And Ergen may see more long-term value in keeping control of the spectrum so that wireless service can be integrated into its own satellite TV business.

The deal with Clearwire, which Sprint owns a majority stake in, also presents obstacles for Dish. There are a series of contractual obligations that would have to be settled for this deal to be consummated. The many entanglements of this deal is likely why Dish has not moved forward with a formal offer for Clearwire.

In the end this leaves, Sprint as the perfect candidate. Not only are there synergies between the spectrum holdings, but buying Sprint could allow a much cleaner and easier way for Dish to get the Clearwire spectrum. Sprint owns a majority stake in Clearwire, and the company has agreed to buy the rest of Clearwire. Clearwire has agreed to this deal. If Dish were to acquire Sprint, then the entire messiness of the Dish-Clearwire deal would go away.

Ergen noted in a conference call to announce the bid, that with the Sprint and Clearwire spectrum, the companies would have twice as much spectrum as AT&T and Veirzon Wireless, the two biggest players in the wireless business.

Potential regulatory issues

The shear volume of spectrum could make it easier for Dish to deploy a range of services from mobile broadband to fixed wireless broadband to mobile television. But the fact that a "new" Dish could own so much spectrum, might catch the attention of regulators. In particular, the FCC may not like the idea of any one company controlling so much spectrum.

The FCC currently has a loose spectrum screen in place which it uses to evaluate mergers between wireless license holders. The agency is in the process of evaluating this screen to see whether or not it should come up with a hard and fast spectrum cap. If the screen is turned into a cap, this could greatly affect the outcome of this merger.

In the end, Dish must move quickly if it wants to get this deal done. The company doesn't have much time to do something with the spectrum the FCC reclassified in December. As part of the conditions for getting that spectrum greenlighted for wireless broadband use, Dish agreed to build a network that covers at least 40 percent of the population in areas covered by its spectrum with a wireless network within the next four years. And it must cover 70 percent of that population with wireless broadband service within seven years. If Dish fails to do this, it must pay penalties and fines to Sprint.

Too much debt to handle?

From Sprint's perspective the deal with Dish also makes sense. Getting access to the Dish spectrum will allow the company to build wider channels for its LTE network, expanding its capacity. And Sprint's customers and shareholders could also benefit in the long term from the business opportunities and efficiencies this deal might bring. For example, Dish's satellite TV business, which has more than 14 million subscribers, could tie in nicely with Sprint's wireless phone and broadband services. The companies could also consolidate call centers, back-office staff and equipment installers that could ultimately turn into savings for Sprint's business.

But there is a major cost involved in such a merger. If Dish were to acquire Sprint, the combined company would take on about $36 billion in debt. Much of the revenue for the new company will come from the paid TV business of Dish, which analysts say is on the decline. There is also the $600 million breakup fee that Dish would have to pay to SoftBank, which has also put its bid in to buy Sprint. Most analysts would agree that SoftBank is in a better financial position to buy Sprint. But given Dish's strong strategic need for Sprint, it's difficult to say which company will ultimately win.

Either way, Sprint, which has been dogged by a series of poor business decisions, is finally in a good position to negotiate.

Disclosure CBS, which owns CNET, is in active litigation against Dish over its Hopper digital video recorder.