SATS quick thoughts following the 4Q24 call

What’s new: we wrote a note on results this morning that also covered how investors would assess odds of business success to in turn assess odds of a spectrum sales (note here). 

In this follow-up, we cover: the 2GHz appraisal and implications for spectrum value and liquidity; our updated 3.45GHz valuation; our updated thoughts on taxes in the event of a sale; the impact of the above on our target price; thoughts on EchoStar’s participation in the AWS-3 auction; comments on their direct-to-device aspirations; the fate of Hughes.  We also provided updated thoughts on how investors might adjust their odds on the prospects of a spectrum sale, based on comments on the call. 

2GHz spectrum appraisal

The Company was required to deliver an appraisal for the AWS-3 and AWS-4 licenses in connection with the spectrum-backed notes refinancing.  We estimated the value of those bands at $35BN.  The appraisal came back at $33BN.  We are lowering our value for the spectrum portfolio from $35BN to $33BN accordingly. 

We suspect that the AWS-3 licenses in the collateral package were valued based on the price paid in the auction.  We suspect that the AWS-4 licenses that are part of Band 66 received the same value.  We suspect that the $2BN shortfall vs our value was captured in the part of AWS-4 that is in Band 70.  We have lowered our valuation for Band 70 accordingly, which lowers the value of the portfolio to $64BN from $65BN.

Band 70 is inherently challenging to value.  We have always taken a conservative approach, and we suspect the appraiser did also.  We can make arguments for why the value should be the same as the price paid for AWS-3 at auction (the only difference in value between Band 66 and Band 70 is deployment cost; the AWS-3 auction prices assumed a cost to deploy the spectrum).   We suspect we will revalue Band 70 higher at some point. 

Based on the appraisal, the Company has additional first lien borrowing capacity of $2.9BN.  With second lien capacity, this increases to $10BN (second lien capacity is based on 60% of appraised value).

We would add the $2.9BN in first lien capacity to the $5.7N in cash for $8.6BN in readily accessible liquidity. 

Band 66 & Band 70 Values

Updated thoughts on 3.45GHz value

We have been valuing 3.45GHz licenses based on the C-Band auction price.  Our logic was that the utility of the bands is identical; the lower auction price for 3.45GHz was simply because it came second, and resources had been exhausted. 

After a little more work, we have a more nuanced view.  The 3.45Ghz band splits into licenses that have DoD coordination requirements and those that don’t.  The licenses with coordination requirements sold for an implied national average price of $0.28 / MHz-POP compared to $0.77 / MHz-POP for those without coordination requirements (the average was $0.68 / MHz-POP).

We would have argued that the licenses without coordination requirements should still be valued at the same price as C-Band; however, we have a mark for these licenses now.  AT&T purchased USM’s 3.45GHz licenses for a 19% premium to the auction price (note here).  This implies a national average price of $0.81 / MHz-POP, which is below the C-Band price of $1.02 / MHz-POP.  We feel compelled to use this mark, now that we have it. 

EchoStar’s 3.45GHz licenses have fewer coordination requirements than the average for the band.  If we assume licenses with and without coordination requirements both receive a 19% premium, our value for EchoStar’s 3.45GHz licenses would fall from $11BN to $9BN.  This lowers the value of the portfolio to $62BN. 

We suspect AT&T got a good deal on USM’s licenses, and the next mark on the band will be higher.  We will likely increase this value at some point soon. 

3.45GHz Value

Updated Spectrum Portfolio Value

Spectrum tax basis

We have underestimated tax leakage on a spectrum sale. 

Previously, we assumed that licenses are amortized for tax purposes from when they are put into service.  Management clarified today that they are amortized from when they are purchased.  As such, the tax basis in the licenses is lower than we thought. 

If EchoStar sells the portfolio at the end of 2026, the tax basis will have fallen to $10BN from a book value of $29BN (we think this would be the optimal time to sell; see the note from this morning for thoughts on timing here).  Based on a portfolio value of $62BN, and taking NOLs into account, taxes on a sale would be $11BN. 

The tax basis falls each year; however, the NOL balance increases by more each year, such that taxes decline modestly each year.

Tax Basis by Band

Spectrum Proceeds after Taxes

Updated target

We have lowered the value of the spectrum portfolio from $65BN to $62BN.  We had assumed a spectrum sale in 2028 to be conservative; we now think it is more likely at the end of 2026.  With taxes on a sale of $11BN, after tax proceeds would be $51BN.  With modest changes to leverage based on results, this results in a new equity value based on a spectrum sale of $110 / share. 

We are increasing our target price despite lowering the value of the portfolio and increasing the taxes on a sale because we are now assuming the transaction happens sooner.  This results in less cash burn between now and the sale, and so less debt. 

The rationale for moving the timing of a sale forward: with the change in administration the timing of spectrum auctions has been accelerated.  This should accelerate EchoStar’s timing for a sale, if the business isn’t taking off. 

The Company will not want to compete against spectrum auctions for limited carrier resources (although we showed in a prior report that the carriers should have capacity for both EchoStar’s portfolio and spectrum auctions; see report here).

Updated Equity Value for EchoStar

AWS-3 auction

Management was asked whether they would use the incremental $2.9BN in first lien capacity to bid in the AWS-3 reauction.  They responded that they would participate in the reauction.  They confirmed that they had $2.9BN in additional first lien capacity but didn’t commit to using this specifically for the auction. 

We thought that EchoStar would compete in the auction to ensure prices reached the prior bid; however, we weren’t sure whether they would bid to win.  We now think they might, but for one key license in Chicago. 

There are four licenses that contribute 75% of the value to the portfolio of 200 licenses being auctioned – one each in New York and Boston, and two in Chicago.  EchoStar has 40MHz in each of New York and Boston, but only 30MHz in Chicago (see slide 14).  We suspect they will bid on all the licenses but bid to win on one of the Chicago licenses.

In the prior auction the Chicago licenses fetched $0.5-0.6BN.  We would assume EchoStar pays at least that.  They may bid to win on other licenses in small markets also, though these may not impact the total outlay much.  Funding the purchase won’t be a challenge, particularly given the incremental $2.9BN in first lien capacity. 

If the AWS-3 reauction fetches a higher price than the original auction, the Band 66 licenses should be valued higher.  We think this is reasonably likely, particularly now that we know EchoStar will be bidding.

Major Markets in AWS-3 D/E Auction

Progress towards victory

The comments on the call probably caused investors to lower the odds they ascribe to EchoStar building a wireless business that would justify the value of the spectrum.  This would make a spectrum sale slightly more likely. 

The target for victory in retail is 40MM subscribers.  The business has inflected; subscribers are growing sequentially; subscribers and revenue will soon be growing year-over-year.  To get to 40MM in 5 years, the pace of adds would have to accelerate from 0.4MM to 2.5MM per year.  They have a long way to go. 

Management’s narrative on retail changed a bit.  They used to say that all the value was in postpaid, and they didn’t want to spend money on acquisition until they had a competitive postpaid product.  They now say that they are happy to be the premium brand within prepaid.  Key subscriber metrics all improved, but it seems that management has less optimism for the step function change in metrics that would come with a mix shift to postpaid. 

The target for victory in wholesale & enterprise is $8.5BN in revenue.  Management wouldn’t break this revenue line out for us.  The context they gave suggest very little progress since last quarter.  The path to success seems to be leveraging relationships and the team at Hughes.  We suspect investors lowered the chances of this business taking off following these comments. 

If the business isn’t on a materially better trajectory by the middle of 2026, we suspect the prospects of a sale in the second half of 2026 are quite good. 

Direct-to-device

We had heard rumors that EchoStar may launch a LEO constellation.  In the past, the Company has suggested that they would partner rather than launch their own constellation.  The most natural partner would be Starlink, but Kuiper could also be a compelling partner.

We asked management whether they planned to launch their own constellation, or whether they would partner. And if they partnered, who would be the best partner.  The answer was a little cryptic. 

Management said they would partner with “manufacturing and technology companies to give us that best experience”.  We aren’t sure what this means.  Did they mean they will partner with manufacturing companies to launch their own constellation, or partner with a technology company that has a constellation?

Until we have more context, we would assume they partner with a company that has a LEO constellation.  There are already too many planned constellations, between Starlink, Kuiper, AST, Globalstar, and others.  Launching yet another would be nuts. 

The fate of Hughes

Hughes has $1.5BN of debt maturing in 2026.  Management had initially said they would refinance the Hughes debt at Hughes.  At the time, they had a rosy forecast for the Hughes business that, had it come to pass, would have made refinancing straightforward.  But it hasn’t come to pass.

Investors have been asking whether there was anything of strategic value at Hughes that would cause the Company to inject more resources to help with the refinancing.  We didn’t think so.  The spectrum and Jupiter 3 are all at EchoStar. 

This may still be the correct read; however, when we asked about growth in Wholesale & Enterprise in wireless, management seemed to anchor future growth to the relationships and team they have at Hughes.  If they believe this, there may be a better reason to keep Hughes alive than we appreciated. 

If it’s just the team and their relationships that are valuable, those can be easily moved.  If they need Hughes to be operating and serving customers to sell mobile services into those customers, then the business may be worth preserving.  Management’s comments seemed to suggest they need the Hughes business to help drive sales for mobile, and not just the team.   However, we have low confidence in this read.