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DISH/SATS: Takeaways from 10-K Spree
Davis Hebert, CFA - Head of Telecom / Media
Joshua Kramer - Senior Analyst, Special Situations
Savannah Buzzeo - Associate Analyst, Telecom / Media
EXECUTIVE SUMMARY
- We are waiting for the next “shoe to drop” on DISH’s capital-raising plans as 3 million pay-TV subs remain in an unrestricted subsidiary. Given the calls for a “holistic” solution, we think risk may be skewed to the downside in DBS if it chooses to raise new money at the Unsub. Meanwhile, Hughes bonds have also been under pressure due to Ergen’s unknown intentions. We think the likelihood of LME or aggressive actions is lower at Hughes and that the fundamental picture is potentially brighter (noting the contract win for the Delta regional jets and new capacity from Jupiter-3).
- Going concern language featured across four 10-K filings.聽The company filed four 10-Ks with the SEC, including one for the parent EchoStar, as well as for DISH Network, DISH DBS and Hughes Satellite Systems Corp. The auditor KPMG (since 2002) raised 鈥渟ubstantial doubt鈥� about the company鈥檚 ability to continue as a going concern since it disclosed it will be unable to repay the $1.983 billion DBS bond maturity in November without additional capital. Management had previously disclosed this on the 4Q earnings call last month.
- DISH Network loses another asset, this time the unencumbered 700 MHz licenses.聽DISH repaid the $951 million convert on March 15 with proceeds from the 鈥渟ale鈥� of its 700 MHz licenses to the parent EchoStar for approximately $1 billion. This values the spectrum at $0.77 per MHz POP and is in line with our prior $977 million valuation. DISH loses yet another asset, as the 700 MHz was unencumbered and now is in a direct subsidiary of EchoStar.
- Substantial capital needs and time is ticking.聽DISH Network disclosed it will need capital not only for the $1.983 billion bond maturity at DISH DBS, but also disclosed its wireless operating expenses would be higher in 2024 and would need additional capital for the company鈥檚 5G network buildout. Although capex is set to be lower in 2024, DISH disclosed it expects higher capex ahead of the 75% PEA coverage requirement by June 2025. Management says it is in discussions with numerous parties about alternatives, with specific mention of Charlie Ergen鈥檚 SPAC (CONX Corp.). However, time is ticking, with EchoStar鈥檚 consolidated cash balance of $2.1 billion at FY23 taken lower in 1Q24 by the $951 million convert repayment and $438 million purchase of the SNR interest.
- Hughes appears to be a fundamental bright spot, but siphons $1+ billion of cash upstairs.聽Hughes鈥� backlog jumped from $1.5 billion in FY22 to nearly $2 billion for FY23, driven primarily by new enterprise contracts (we suspect from the Delta regional jets win announced in November). Jupiter-3 is also expected to reinvigorate both the enterprise and consumer broadband businesses. However, post-quarter-end, the company moved $1.0 billion out of the $1.7 billion cash pile at Hughes to the parent, presumably to repay the converts at DISH Network.
- Odds and ends.聽Not surprisingly, DISH is unlikely to have exercised the $3.6 billion purchase option of the 800 MHz spectrum from T-Mobile by April 1, 2024; Charlie Ergen owns a 54% economic interest and 91% voting interest in the company; DISH is under contract with Maxar to build a new GEO satellite for its pay-TV business; the company derives a portion (not quantified) of revenue from ACP subscribers in both satellite (Hughes) and wireless (Boost).
RELATIVE VALUE
DISH bonds have bounced along the bottom (exchange prices) as we await next shoe to drop.聽DISH have suffered a steep selloff YTD after the company disclosed it moved 3 million pay-TV subscribers out of DBS and into an unrestricted subsidiary, as well as most of its unencumbered spectrum assets out from under DISH Network to a subsidiary of the new parent EchoStar post-merger. The 1L DBS notes are down significantly (26s down 8 pts and 28s down 13), as are longer-dated DBS unsecured notes (26s down 5 pts, 28s down 13 pts and 29s down 11). Levels have bounced along the bottom in recent weeks, since DISH had originally targeted the unsecured notes in an exchange that failed due to bondholder cooperative pushback. The other 鈥渟hoe鈥� is yet to drop but management says it has substantial flexibility with the unrestricted subsidiary, as well as unencumbered spectrum. Notably, despite the going concern language highlighted herein, the November 2024 DBS bonds have been holding together well, trading at 95 (14% yield to maturity), suggesting high confidence DISH can raise capital for a refinancing. The DISH Network spectrum notes have come off the highs but
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