Why Wall Street agrees with state AGs on Dish's future in wireless business

The 16 state attorneys general suing to block the federally approved merger of T-Mobile-Sprint are zeroing in on what they believe is the deal’s fundamental flaw: That the government’s plan to neutralize the transaction's antitrust concerns will fall flat on its face.

And Wall Street, for the most part, agrees.

That plan, of course, is the creation of a new, fourth wireless major network out of Charlie Ergen's Dish Network. Dish, according to a government settlement that approved the merger, will take the place of Sprint in the aftermath of the deal, which has agreed to buy assets and spectrum from the newly combined company. The theory is that it will now compete with the likes of AT&T, Verizon, and yes, the company it's buying all these assets from, T-Mobile-Sprint. The Justice Department's Antitrust Division approved the merger on the grounds with the conditions that spectrum-fattened Dish is ready to compete in the wireless business.

But Wall Street is dubious. Dish shares extended gains on Tuesday after rallying four percent Monday following the network being upgraded by two analysts who viewed the stock more favorably for several reasons, including optimism over the company’s future as a wireless carrier.

However, shares of Dish have fallen close to 20 percent since the DOJ announcement based on a prevailing consensus among Wall Street analysts, investors and telecom executives who were interviewed by FOX Business. They believe Dish has neither the financing nor the knowledge to build out a significant network, or make inroads into superfast 5G technology that can compete with telecom giants like Verizon, AT&T, and now, the combined T-Mobile –Sprint.

One problem with selling the story to Wall Street has been the dearth of information about Dish’s plans. Despite receiving the DOJ’s blessing about a month ago, the network has yet to provide any details about how it will execute its wireless build-out. Ergen, for his part, has been largely mum about his outlook on how Dish’s main business of providing satellite television services – that has been losing money amid high debt loads – will be able to transition into an outfit that is supposed to compete in high-speed internet services such as superfast 5G wireless technology.

Another issue, telecom experts say, is that the Dish business model may not make sense. The company is a newcomer to the wireless business; its management ranks are considered weak in comparison to major players. It has no infrastructure to be a significant competitor at least for the near term, these people say.

“It doesn’t take a genius to realize that [Dish’s] business is levered and shrinking,” said Craig Moffett, founding partner of MoffettNathanson research. “One question is: Will Dish survive and stay solvent long enough for the wireless business handoff to happen?”

And as Wall Street seizes on those question, the state attorneys general are, too.

Sources tell FOX Business the state attorneys general are making Ergen’s vulnerabilities the lodestar of their case to block the merger. The attorneys general, led by Letitia James of New York, believe Dish will be such a weak wireless carrier that the post-merger competitive landscape will lead to higher prices for consumers following the elimination of Sprint as a standalone outfit. The attorneys general are inundating Dish with legal discovery as part of a deep dive into its business model, people familiar with the matter say.

A Dish spokeswoman declined to comment, but would not dispute the matter. A spokesman for James would not comment, but pointed FOX Business to a press release that was issued after the DOJ’s approval.

Ergen is said to be keenly aware of the danger the case brought forth by the attorneys general presents, and is even telling associates to limit the emails they send him since he is being forced to pass much of that information to the state attorneys general, these people say.

While a Dish spokeswoman declined to comment, a company executive who is authorized to speak to the press told FOX Business that Dish believes it is well-positioned to compete in the wireless market.

“We’ll be able to use T-Mobile’s network from day one and we’ll have greater pricing flexibility,” the executive said.

This person said the company has no concerns about T-Mobile throttling – or slowing – Dish’s service as competition heats up.

“In the consent decree, there is non-discrimination language preventing T-Mobile from engaging in discrimination," the executive added.

Another Dish executive provided a statement to FOX Business that said Dish will begin serving wireless consumers immediately upon the deal’s close (the date has not been finalized) and Dish will bring competitive pricing to the market.

Of course, Wall Street has been wrong about companies in the past, and the case of the state attorneys general, filed in a Manhattan federal court even before the DOJ settlement was reached, is far from a slam dunk. At the moment, of the 16 state attorneys general who have signed on to the case, only one is a Republican (Ken Paxton of Texas, where competitor AT&T is headquartered). T-Mobile-Sprint officials say the lawsuit to block the deal in federal court displays an ideological bias against the Trump administration's free-market approach to mergers rather than any real concerns of consumer harm.

As of this story’s publication, the attorneys general have been trying to recruit more Republicans without success. While state attorneys generals are looking to grow their ranks, FOX Business has learned T-Mobile and Sprint are looking "to pick off" the state attorneys general and convince those in the suit to drop out, and others from joining the effort. Attorneys for the companies are also holding negotiations with individual states in the hopes they can reach a settlement by agreeing to additional possible remedies aside from what was reached with the DOJ, these people tell FOX Business.

Still, the state attorneys general believe much the same way Wall Street traders are betting – that Dish can’t compete with a juggernaut that the combined T-Mobile-Sprint will represent in the wireless market.

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T-Mobile is expected to ramp up its efforts to attract customers at its own established prepaid brands including MetroPCS and T-Mobile One. T-Mobile is used to running these businesses and unlike Dish, T-Mobile customers will potentially have better quality service and will be able to keep their mobile devices.

As part of the DOJ settlement, Sprint sold its pre-paid wireless business–which are priced to serve less-affluent consumers – to Dish. But it's very possible customers will leave the new Dish prepaid business for T-Mobile's, which will offer better pricing terms and better service, some analysts say.

“A year from now, T-Mobile will likely get all its customers back,” said veteran telecom executive and Boost founder Peter Adderton.

The market and the attorneys general are betting Dish will not be disrupted in a way that has been sold by the DOJ, and the courts will see through the facade.

As Moffett puts it: “Is there any reason to assume Dish will be stronger than Sprint?”