Sector Spotlight: Industry digests $17B EchoStar-SpaceX spectrum license deal

Welcome to the latest edition of “Sector Spotlight,” where The Fly looks at a new industry every week and highlights its happenings.

COMMUNICATIONS INFRASTRUCTURE NEWS: Verizon (VZ) Frontline announced the deployment and activation of more than 950 5G Ultra Wideband-enabled smartphones as part of a mission-critical communications upgrade for the Tampa Police Department. The new devices support the department’s “Connected Officer” initiative, which was developed to help ensure every officer on patrol is equipped with a smartphone loaded with law enforcement applications.

T-Mobile (TMUS) announced that the Los Angeles Organizing Committee has selected T-Mobile for Business as the official telecommunications services provider of the Olympic and Paralympic games in Los Angeles. T-Mobile for business will develop and deploy solutions – powered by the T-Mobile 5G Network – to help LA28 create tech-forward production.

JetBlue (JBLU) announced it will be the first airline in the world to sign on with Amazon’s (AMZN) Project Kuiper, an advanced low Earth orbit satellite broadband network, to bring even faster and more reliable connectivity to its onboard Wi-Fi known as Fly-Fi.

EchoStar (SATS) has entered into a definitive agreement with SpaceX to sell the company’s AWS-4 and H-block spectrum licenses for approximately $17B, consisting of up to $8.5B in cash and up to $8.5B in SpaceX stock valued as of the entry into the definitive agreement. Additionally, the definitive agreement provides for SpaceX to fund an aggregate of approximately $2B of cash interest payments payable on EchoStar debt through November of 2027. In connection with the transaction, SpaceX and EchoStar will enter into a long-term commercial agreement, which will enable EchoStar’s Boost Mobile subscribers – through its cloud-native 5G core – to access SpaceX’s next generation Starlink Direct to Cell service. EchoStar anticipates this transaction with SpaceX along with the previously announced spectrum sale will resolve the Federal Communications Commission’s inquiries. Closing of the proposed transaction will occur after all required regulatory approvals are received and other closing conditions are satisfied. The proceeds of this transaction will be used for, among other things, retiring certain debt obligations and funding EchoStar’s continued operations and growth initiatives. Current operations of EchoStar’s DISH TV, Sling and Hughes will not be impacted by this transaction. In early trading on Monday, shares of T-Mobile (TMUS) were down 5%, Verizon (VZ) down 2.6%, Charter Communications (CHTR) down 3%, and AT&T (T) down 3%. EchoStar disclosed that on September 8, the chairman of the Federal Communications Commission sent a follow-up letter informing the company that he has directed the staff of the FCC to terminate the agency’s investigation of EchoStar as set forth in the May 9 letter. “While this resolves the FCC inquiries commenced in the May 9 Letter, our previously announced transactions with AT&T and SpaceX continue to remain subject to FCC approval (and the other previously announced conditions to closing of those transactions),” the company said in a regulatory filing.

ANALYST COMMENTARY: Raymond James downgraded Iridium (IRDM) to Outperform from Strong Buy with a price target of $26, down from $39. The deal represents by far Starlink’s biggest foray into competing directly with Iridium’s base businesses, the analyst told investors in a research note. It expects Starlink to be aggressive in seeking country-by-country S-Band approvals. Additionally, BWS Financial downgraded Iridium to Sell from Neutral with a price target of $16, down from $25. Starlink intending to acquire the wireless spectrum from Ecostar creates “a dominant competitor that has been aggressive with pricing,” said the analyst, who expects Starlink to encroach on Iridium’s IOT business quickly once the spectrum sale is approved.

UBS downgraded AST SpaceMobile (ASTS) to Neutral from Buy with a price target of $43, down from $62. The analyst still believes AST will be a leader in the space-to-cellular broadband market. However, Starlink’s acquisition “fortifies its position” in the space-to-cellular market and increases risk for AST, the analyst noted. UBS sees room for multiple players in the space-to-cellular market but says execution risk is now higher for AST.

Deutsche Bank raised the firm’s price target on EchoStar to $102 from $67 and reiterated a Buy rating on the shares. The transaction adds $14.4B, or $42 per share, in estimated after-tax spectrum value, the analyst tells investors in a research note.

Morgan Stanley increased its price target on EchoStar to $91 from $59 and maintained an Equal Weight rating on the shares after updating the firm’s estimates to reflect the sale of spectrum to SpaceX, the firm’s updated Boost forecast, and a higher value for remaining spectrum. The news of the FCC concluding its investigation suggests less near-term pressure to monetize remaining holdings, the analyst tells investors. If the SpaceX deal closes, EchoStar will provide investors indirect exposure to SpaceX through the public markets, says the analyst, who notes the $8.5B stake is equal to about 30% of EchoStar’s market cap.

Roth Capital commented that the EchoStar “fire sale” continues with the company entering into an agreement to sell spectrum to Starlink for $17B. While Starlink will get incremental capacity for direct-to-device, its services will require next-generation satellites and a smartphone refresh, the analyst tells investors in a research note. Further, Roth believes the direct-to-device go-to-market continues to favor AST SpaceMobile with AT&T and Verizon relationships versus Starlink’s T-Mobile partnership. Nonetheless, the firm expects near-term pressure in AST shares from the EchoStar deal with Starlink, but thinks the agreement validates the company’s strategy and market opportunity. It believes AST’s long-term story is unchanged and kept a Buy rating on the name with a $56 price target.