Oh Musk, Musk, Wherefore Art Thou Musk? ($SATS/SpaceX Romance)
O Romeo, Romeo, wherefore art thou Romeo?
Deny thy father and refuse thy name.
Or if thou wilt not, be but sworn my love
And I’ll no longer be a Capulet.
‘Tis but thy name that is my enemy:
Thou art thyself, though not a Montague.
What’s Montague? It is nor hand nor foot
Nor arm nor face nor any other part
Belonging to a man. O be some other name.
“What’s in a name?” The tragedy of Romeo and Juliet was born not of love, but of the names they bore, a fatal mismatch of identity. So too with Musk and Ergen, where the name isn't Montague or Capulet, but “$150 per share intrinsic” vs. “$30 per share market.” Let’s put on our investment banker hat and find out where these lovebirds could end up.
Strategic Objectives
SpaceX's primary objective is to gain access to EchoStar’s 2.0 GHz MSS license to enable direct-to-device (D2D) service on Starlink. The secondary objective is to evaluate EchoStar’s wireless business for direct investment/purchase. Musk realizes the scarcity value of spectrum, but it is unclear as to his ambitions in running a wireless business competing against 3 large incumbents with a non-differentiated offering.
EchoStar’s primary objective is to preserve spectrum valuation amid bankruptcy risk. Secondary is to see if SpaceX can provide a strategic lifeline without sacrificing control or meaningful upside.
FCC’s primary objective is to free up spectrum for full use.
Constraint, or the “Name”: There's a massive delta between intrinsic spectrum value (possibly $150/share) and market equity price (~$30/share), making any meaningful straight equity investment almost impossible.
1. SpaceX Leases a Portion of MSS (2.0 GHz) Spectrum
Execution Path: Carve out MHz (a 5x5 slice into a bankruptcy remote vehicle) and carve out specific geographic footprints. Possibly pair with a joint FCC petition to modernize the band rules. The FCC confirms the exclusivity of Echostar’s 2GHz licenses. Echostar provides right-of-first-offer (ROFR) to SpaceX for this spectrum slice.
SpaceX: Fastest and cleanest route for SpaceX. No equity involvement. Just a commercial lease with FCC approval. Simple and achieves its primary objective for a fee.
Echostar: Also achieves its primary objective of protecting spectrum value. Eliminates uncertainty in the exclusivity of its AWS-4/MSS licenses.
FCC: Free up a small piece of spectrum; score political points with Musk.
This scenario could also be structured as a satellite JV where Echostar contributes spectrum and SpaceX contributes cash. This has the nice feature of creating a bit of liquidity for EchoStar.
I think this scenario is the most likely outcome: it achieves SpaceX’s primary objective without any stretch. Echostar attains the confirmation of its exclusivity in 2GHz licenses, which is HUGE in a liquidation scenario. The FCC is happy to resolve SpaceX’s complaint. It doesn’t solve Echostar’s other issues with respect to meeting buildout requirements, but it gets SpaceX off of its back and allows Echostar to file for bankruptcy and liquidate without any uncertainty on the AWS-4 block.
2. Minority Strategic Investment + Mobile Strategic Partnership
Execution Path: In addition to option 1, also rename Boost Mobile to Starlink Mobile. SpaceX makes a PIPE (Private Investment in Public Equity) into EchoStar. Proceeds go to EchoStar to support buildout and Starlink Mobile retail deployment. Ring-fence Hughes and DDBS.
Potential Structuring Tools: Warrant package with strike price closer to intrinsic value; board seat; rights of first refusal for SpaceX on MSS asset monetization.
SpaceX: Aligns incentives without triggering full acquisition premium. The problem is that Musk doesn’t have operational control, which is not his MO, especially for such an important investment. Does Musk want to compete in the consumer wireless industry with an undifferentiated product offering?
Echostar: The huge valuation gap complicates PIPE pricing. Assuming a $10B PIPE, at what price is Ergen willing to sell when his other option is liquidation for $150 per share? The warrant package might bridge some of the difference, but it’s at the end of the day a very dilutive transaction (we don’t need an Excel spreadsheet to see this) if the upside from the continuing operation isn’t visible. Can Starlink Mobile grab enough consumer subscribers?
What about a smaller PIPE, say $2B? Would that work for Ergen? That would represent approximately 18% of the company based on the current stock price. Ergen can issue some warrants struck at intrinsic value to entice Musk. Would Ergen allow this dilution to bring Musk into the fold? In theory I think that might work for Ergen given the potential benefit of Starlink Mobile, but $2B does not give him enough liquidity and time to bring Echostar’s wireless business to break-even, and we most likely will end up where we are a year later but ~18% poorer.
FCC: The FCC should be pretty happy with this outcome, as the spectrum will be better used, and Echostar is on firmer footing.
I think this scenario has a lot of issues. The primary one being Musk’s intention in the wireless industry. Why compete here when the three major carriers are already efficient? And why allow Ergen to drive the bus? Too many cooks in the kitchen in this scenario and too many structural problems with valuation.
3. Full Acquisition of EchoStar
Execution Path: Everything in Option 2, except instead of a PIPE, SpaceX acquires Echostar for $100 a share. Ring-fence Hughes and DDBS.
Potential Structuring Tools: Maybe a partial cash/stock deal. Contingent Value Rights (CVR) for Echostar shareholders to bridge the gap between $100 a share and the final liquidation value of certain spectrum assets.
SpaceX: Full control of Echostar. But where to source the cash needed for this acquisition, with a massive premium over market? SpaceX is already a huge money burner. Now it’s got to support another money-losing business.
Echostar: “Where do I sign?” Nah, just kidding. I think Ergen owning SpaceX stock is unlikely. As a shareholder, I think CVR is dogshit.
FCC: The FCC should be pretty happy with this outcome, similar to Option 2.
I think this scenario solves Musk’s control issues, but creates a lot more issues on valuation and deal structuring. Financing for the deal is going to be very tough.
Century Egg Advisor’s Recommendation
If I were advising SpaceX, I'd recommend Option 1: This gives SpaceX operational access today without a risky entry into consumer wireless. Options 2 and 3 have too many issues, as outlined above, despite that they may mean substantially more advisory fees to me (hypothetically) than Option 1.
Options 2 and 3 really hinge on how Musk sees the unique quality of O-RAN and whether he can disrupt the incumbent carriers - which I highly doubt. The difference between the stock’s intrinsic value and current market price is a true impediment to any equity investment into Echostar.
From EchoStar’s perspective, Option 2 and 3 must solve two objectives: 1) a business plan that would see EchoStar’s wireless business break even before it runs out of money, and 2) equity infusion at close to intrinsic value so they don’t run out of money. This is a tall task even for Elon Musk. As EchoStar shareholder, I don’t get excited even if these two objectives are met - where’s my ROI on $60B of spectrum portfolio?
In a situation where “names” control everything, Option 1 allows both lovers to get what they want without the tragedy. Seem unsatisfactory, but maybe just a kiss as a start…
And maybe next? We pivot to a K-drama plot: the mysterious billionaire who falls for the grounded, debt-laden mobile operator with a heart of gold and a portfolio of underappreciated spectrum. They clash at first; he's all speed and tech, and she’s all grit and survival, but fate keeps bringing them together. Both having intense deja vu but can’t explain why. Turns out they are from two different worlds in a multiverse, transiting into each other’s universe seamlessly, initially caused by a glitch in the LEO constellation launched by the mysterious billionaire. Those underappreciated spectrums turned out to be not just electromagnetic radiation in 4D, but actual empathy without intention or direction in 11D, resonating and bringing timelines together where hearts align but timing (and valuation) never did.
Thank you for reading…