EchoStar: Chair Charlie Ergen Finally Yields, Scoring Big for Shareholders

Key Morningstar Metrics for EchoStar

• Fair Value Estimate: $65.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

EchoStar SATS agreed to sell its 600 MHz and 3.45 GHz wireless spectrum licenses to AT&T T for nearly $23 billion. These licenses account for about a third of EchoStar’s spectrum holdings on a MHz-POPs basis, which is a measure of spectrum depth and population coverage.

Why it matters: This transaction marks a massive strategic shift for EchoStar and provides much-needed capital to repay debts and invest in the business.

• EchoStar earns a nice premium on the $13.5 billion paid for the two spectrum blocks at auction in 2017 and 2022. By selling its low-band holdings, the firm has abandoned any plans to provide broad terrestrial wireless coverage and will rely on a new agreement with AT&T to serve customers.
• This sale alone will allow EchoStar to repay its debt load in full. The firm will likely repay the $11 billion in debt that comes due through 2027, including bonds secured by the spectrum it has sold, and retain the remainder to invest in the business.

The bottom line: We increase our EchoStar fair value estimate to $65 per share from $25. If regulators approve the AT&T transaction, we expect the firm to sell additional spectrum blocks to T-Mobile TMUS and Verizon Communications VZ, likely raising at least an extra $10 billion.

• In addition to the clear benefits of monetizing spectrum, we lower our assumed weighted average cost of capital for EchoStar to 8% from 9%. We also now expect the firm to build a much smaller retail wireless business, operating at far lower margins but with minimal capital needs.
• We also assume the firm retains its AWS-4 licenses and attempts to build a satellite offering around the band, with moderate success. Our valuation model yields a fair value estimate of nearly $90 per share. However, we assume a 25% chance that regulators will block the deal.

Big picture: Given chair Charlie Ergen’s long reluctance to sell spectrum, we suspect EchoStar’s fallback options if the AT&T deal fails are very limited.