Until Monday, one of the more boring stocks in my Strategy Lab portfolio was Sprint Nextel Corp., the U.S. phone company.
I’m not typically fond of guys who sell plumbing, which is how most people look at Sprint. Whether you connect to the Internet using wireline or wireless technology, the service provider is really just the guy selling you access. Customers regard a phone and Internet connection as a commodity service, and are highly sensitive to price.
I added Sprint to my portfolio because I saw the company as a turnaround story. It owns a lot of wireless spectrum, which you can think of as the wireless equivalent of real estate, allowing it to build higher-speed networks with lots of capacity.
At the time I added Sprint, it was trading at a significant discount to its peers, AT&T and Verizon, and I saw it as a potential multiyear play on the rollout of new 4G wireless technology across the U.S. market. Either Sprint would succeed in the 4G business, closing the valuation gap with its peers, or something else tied to the company’s impressive wireless spectrum assets would happen to trigger a fairer valuation.
It looks like I’ll be parting with my Sprint shares before too long. A few months ago Japan’s Softbank, a wireless operator with over 30 million customers, made a friendly bid to become the majority shareholder of Sprint. This drove the shares higher, and also led me to believe I’d ultimately sell after the deal closed.
But on Monday, before the market open, Dish Network Corp., a U.S. satellite TV company, made an unsolicited offer to acquire Sprint. The offer came at a 13-per-cent premium to the Softbank offer, and sent Sprint shares soaring. I suspect the Dish bid will succeed. If I stick around, I’ll end up with cash and some shares in Dish Network.
Dish knows that the TV business is changing. Charlie Ergen, the company’s chairman, has been quite vocal about his positive opinion about both Netflix and Amazon in the streaming video business. He has acknowledged that Dish needs to either own a wireless network or partner with a wireless provider so it can offer TV customers a compelling experience both in and out of the home. He knows Dish needs to shift its business toward a more-modern model of how people want to watch TV.
I’m happy for Dish to take my Sprint shares away at a nice premium. But do I want to be an investor in Dish? Not necessarily, although I’m still evaluating things.
I respect the business Dish has built. But it won’t easily become a leader in the future of mobile video. It’s threatened by the “over the top” model, meaning TV delivered via an Internet connection, and it realizes that today’s kids are not going to grow up paying $100 per month for a prepackaged bundle of cable – or satellite – TV channels.
Dish is responding to changes in the market rather than leading those changes. If Dish sits still, it will slowly die. Mr. Ergen knows it, and a bid for Sprint is a rational response. But a rational step to avoid death doesn’t necessarily make for a great investment.
The optimist in me still thinks this is interesting, though. Sprint has about 56 million customers while Dish Network has about 14 million. Together that’s about 70 million, minus whatever level of overlap exists.
That’s a lot more than Netflix’s 27 million U.S. streaming customers. But even with a Sprint deal, Dish would still be way behind Netflix in terms of technology and execution in achieving a more-modern TV experience for this customer base. Dish would have a lot of unproven potential, which likely isn’t enough keep me as a shareholder.
My instincts tell me that, while Dish is smart to make an offer for Sprint, I don’t want to be a Dish shareholder. So I’ll likely wait to see if a higher bid emerges. Either way, I’ll likely sell my shares of Sprint soon and re-invest the money in Whole Foods Market, a stock I wrote about in a recent column.
|S-N Sprint Corporation||7.89||
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|DISH-Q DISH Network||54.77||
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