As DOJ nears deal approval, T-Mobile bets Sprint merger is worth giving Dish a new lease on life

Charles Ergen

Andrew Harrer | Bloomberg | Getty Images

There's a term in poker called "pot committed." It means arriving at a point in time when it no longer makes sense to fold a hand regardless of the circumstances. When you're pot committed, you've decided to bet whatever it takes, and you just hope your opponents don't have a better hand.

T-Mobile and Sprint have decided they are pot committed on their merger, a deal that's been in the works for years. Their transaction, which would form a combined company with an enterprise value of about $160 billion, requires both companies reach an agreement with the Department of Justice about creating a new fourth wireless competitor. A deal could be announced as soon as Wednesday, according to people familiar with the matter. CNBC's David Faber first reported the Department of Justice would sue to block its deal if an agreement with regulators wasn't reached this week. The New York Post reported last week a deal was imminent.

That new wireless competitor will be Dish Network, one of the largest U.S. providers of video. Dish has wanted to become a wireless provider for about a decade, spending billions on airwaves that it has been storing for years. Unfortunately for T-Mobile, arguably the worst person the company could be running up against in this situation is Dish CEO and co-founder Charlie Ergen, a famed poker player who is notorious for keeping his cards close to the vest.

Here's what Ergen said at his first-quarter earnings conference call way back in 2014:

"When I used to play poker and everybody was throwing chips and betting crazy on the table, and I had really good cards, I always felt it was better to sit back and let them go at it," Ergen said. "Every time they went at it, I'd learn something, and as I sat back they didn't learn what I had. And I learned to trust my cards. I wasn't a very good poker player, but when a bunch of drunken fools were throwing money around, occasionally I was able to pick up a pot at the end of the day."

In recent days, several telecommunications analysts, including Craig Moffett at MoffettNathanson and Jonathan Chaplin at New Street Research, have questioned if a merger that strengthens Dish as a disruptive fourth wireless player is worth it for T-Mobile. Dish could wind up being a far more frightening competitor than Sprint, which would face massive capital constraints and rapidly fleeing customers without a deal with T-Mobile.

Deutsche Telekom, the German telecommunications company that will control the combined Sprint and T-Mobile, is concerned about Ergen's plans, according to people familiar with the matter. That's why Deutsche Telekom has spent the last several weeks arguing for limitations on Dish's ability to sell a percentage of its wireless business to a strategic investor, such as Amazon, Google or a cable operator such as Comcast or Charter.

Spokespeople for Dish, Deutsche Telekom and SoftBank (Sprint's majority owner) declined to comment.

But given DOJ pushback for a strong fourth player, the limitations on Dish will be minimal, if anything, according to people familiar with the matter. Dish will likely be free to sell an equity stake in its wireless business to whomever it sees fit, meaning that Ergen may have a partner with an enormous balance sheet in a year or two. The extra capital will help Ergen build out a 5G wireless network as its network-sharing agreement with T-Mobile, which people familiar with the matter have said lasts six or seven years, winds down.

Dish will also be immediately incentivized to offer cheaper services than T-Mobile (as well as AT&T and Verizon) to gain subscribers, Moffett wrote. Since Dish will be starting with no subscribers and no average revenue per user to grow for investors, Dish will be in full customer addition mode. This was actually T-Mobile's strategy for years, undercutting AT&T and Verizon on price and charges for going over data limits after failing to sell to AT&T in 2011.

"If Dish enters the market with a large amount of capacity and no meaningful subscriber base of [average revenue per user] to defend, they would have every incentive in the world to be a disruptive discounter," Moffett wrote in a note to clients late last week. "One need not believe in a follow-on Dish deal with Amazon, Google or a cable operator to see this as bad for the market, and indeed, worse than the 'no deal' scenario for T-Mobile."

Moving forward

T-Mobile doesn't know Dish's plans and is worried it may be enriching an intelligent, highly motivated competitor. But Deutsche Telekom still likes a merger with Sprint more than the alternative of doing nothing, sources said.

First, even if Dish partners with a big-balance-sheet company and builds out a national network, losing Sprint would allow a large tech company or cable operator to buy the Sprint network and spectrum out of bankruptcy or for a cut-rate price. SoftBank is highly unlikely to commit billions of dollars to support Sprint as a floundering number-four player, according to people familiar with the matter. SoftBank CEO Masayoshi Son has moved on to pay more attention to technology investing and his $100 billion Vision Fund (and maybe a Vision Fund II) instead of operating Sprint.

So while Dish's partner may be a concern, that same partner could actually be in a better position to challenge T-Mobile if it bought Sprint, leaving T-Mobile unchanged as a distant third player. Sprint already has a functioning national network that's transitioning to 5G. Plus, T-Mobile would likely need more spectrum since it wouldn't be acquiring Sprint's.

Second, for every customer that signs up to Dish's wireless network, T-Mobile will receive about half of the economics, according to people familiar with the matter. That's the price Dish has agreed to pay to share T-Mobile's network. So if Dish is going to severely undercut T-Mobile on price and then give up 50% of the revenue to T-Mobile, Dish is going to lose a lot of money, according to people familiar with T-Mobile's thinking.

Still, Dish may be able to recoup some of those early losses if it does build a network of its own. That's because Dish's spectrum will be more productive than that of Verizon, AT&T and T-Mobile as it will be utilized purely for 5G, instead of also hosting 2G, 3G and 4G users, and its eventual network will be built specifically for 5G, allowing Dish to operate on a much lower cost basis than its rivals, wrote New Street's Chaplin.

And third, T-Mobile needs to get more competitive with AT&T and Verizon as U.S. customers move to 5G in the coming years. Subscribers will have a chance to reset providers based on who has the most reliable, fastest network with new handsets and new technology. T-Mobile could be at a severe disadvantage to its larger competitors if it doesn't have the necessary resources and capacity to keep up.

Even with DOJ approval this week, there's no certainty a T-Mobile and Sprint merger will happen. There's one more giant hurdle: an outstanding lawsuit from 13 state attorneys general and the District of Columbia who are suing to block the deal on anti-competitive grounds.

But Dish suddenly has a lifeline — a chance to become a national provider of bundled video and wireless service. Dish will also walk away with prepaid carrier Boost Mobile and some Sprint wireless spectrum as a mandated DOJ divestiture. Having watched cable broadband internet undercut Dish's satellite TV advantage, Ergen is one step closer to having a chance to offer a package of competitive mobile internet service.

Sometimes holding your cards and watching everyone else bet pays off.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.

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