The Worst-Case Scenario for $SATS
What Are We Missing? How Do You Lose Money?
There’s one question I keep turning over when looking at EchoStar ($SATS):
If the spectrum is worth what I think it’s worth, why is the equity still trading at a fraction of its value? The usual answers, such as 1) it’s underfollowed, 2) poor historical experience and Ergen won’t sell for anywhere near a realistic price, 3) non-existent investor relations, 4) difficulties in pricing spectrum, 5) potential regulatory actions, and 6) complicated capital structure and oh it’s about to go bankrupt, may bridge some of this gap but they don’t seem satisfactory when SATS is trading at 0.2x-0.3x intrinsic value with a potential liquidation scenario around the corner.
This case is particularly interesting because spectrum valuation is different from a business valuation, where outlook on growth, operating leverage, and capital allocations are huge levers and, depending on your views, could provide a range that is substantially different than the current market price. In SATS case, we have spectrum, a singular asset that is in demand with multiple potential interested parties. Spectrum valuation is dependent on the profitability and outlook of multiple interested parties in the auction process and is not subject to the idiosyncratic nature of a single business. It’s also not substantially leveraged relative to the asset value ($60B spectrum asset vs. $13B of external financial debt). Let’s not look at Hughes and DDBS to simplify the story, but let’s add $2B of potential claims from those businesses to our math, and we get to $45B of equity value vs. $7B of market cap. This is very simple math, and we can add lots of bells and whistles to knock this number down, but the bottom line is that this gap is too wide (and has been too wide for a long time). Clearly we’re missing something.
I used to cover financials (banks, finance companies, insurance), and seeing something that trades at below 0.5x book value was not common outside of the GFC. If we see something trading at 0.2x book value outside of the GFC, it’s most likely a zero. They typically have 2 things wrong with them: 1) Asset marks are way off, and 2) there is a very low ROE with no potential fixes in sight.
So let’s forget all the drama and look at what would need to happen to justify the current Echostar valuation:
Scenario 1: Bankruptcy, No Deal
The most obvious downside scenario is that SATS files for Chapter 11 AND there’s no spectrum monetization. The narrative here is sobering:
Few bidders emerge for its mid-band spectrum (3.45 GHz, AWS-4), because of coordination complexity or ownership screens. The FCC is not cooperative in removing the ownership screens for whatever reason.
The auction process drags out for years due to Charlie Ergen’s famously high “clearing price,” which deters serious bids.
The FCC might try to take a portion of the licenses away due to missing buildout requirements, but that portfolio is fairly small.
The result? Stalemate. Spectrum sits unused. Equityholders are unhappy (sounds familiar, ha!). Bondholders remain in their natural state: waiting for something to go wrong.
How do you emerge from bankruptcy? Partnering with someone to use the spectrum productively? Leasing the spectrum out? Ergen continuing to bang his head against the consumer market, hoping for a miracle? SOOOO…what else is new?!
“What did you say? We need a rights offering?”
This scenario goes against everyone’s natural interests:
Ergen had his shot at creating the 4th network but failed. He will have to realize that his wallet is better served by providing a quick liquidation. Why hold out for an extra $10-20B in proceeds when he can earn that money by investing the proceeds in bitcoin and shitcos?
The FCC wants to free up spectrum, and SATS portfolio is like an oasis in a desolate desert. I would imagine the FCC wants to do everything in its power to facilitate a transaction, including providing a forbearance on the spectrum screens and agreeing to looser buildout restrictions for buyers.
The potential spectrum bidders have this one opportunity to grab valuable spectrum in size. Strategic necessity of scarce assets dictates a bidding war. As a weary traveler in a desolate desert, do you want to pass up on this oasis just because you think there’s a cheaper oasis coming up in a few miles? Sure the water might be cheaper, and you’re not thirsty now, and maybe you can just buy half a bladder…and…and - these are the thoughts of a dried-up dead man. Instead, Comcast is thinking, “What happens if Charter buys this spectrum? Where does it leave me?” SpaceX is thinking, “Do I even have a business plan anymore if I don’t get the 2 GHz spectrum? What’s a few billion dollars but a tweet about DOGE coin?” Amazon is thinking, “Yes, it’s premature for me to buy spectrum now, but will there be anything left when I’m actually ready?” VZ/T are thinking, “Are we dumb enough to repeat our mistakes in 5G again?”
I’m just guessing here but I don’t think we will end up in scenario #1.
Scenario 2: Zombie Mode
The second bear scenario is more insidious: no Chapter 11, no monetization, just a decade-long zombie existence. SATS sells off its unused 3.45 GHz spectrum to buy time, signs an MVNO deal or two, maybe leases to cable partners, and dribbles along with negative-to-low ROI wireless ops that never justify the spectrum’s intrinsic value.
This is the nightmare for equityholders. Not because the spectrum is worthless, but because it's trapped in a vehicle that can’t extract value.
The bulls will argue Ergen is too smart - and the cost structure too punitive - for this to last. But Ergen is also proud. If he believes he can “scale the network,” he might try. Even if that means burning capital for 5–7 more years. Look at what Rakuten is doing in Japan. They’ve been at it for a long time with very little to show for it.
BTW, how old is Ergen now? What’s the average life expectancy? I’m joking, of course. He looks pretty healthy…
Scenario 3: Price War Suicidality
There’s a third path: SATS initiates a price war, slashing mobile service prices in a bid to buy share. This is a desperate fantasy - the idea that you lose money today but win market power tomorrow. The Big Three carriers are too entrenched, too deep-pocketed, and too agile. They’ll undercut SATS and wait for it to bleed out.
So What IS the Worst Case?
Scenario #2 scares me the most. Strategic will keep SATS limping along until all of the spectrum assets are leveraged to the tits. Bondholders are happy to oblige for a pound of flesh. At the end of the day, we have nothing to show for it. This path doesn’t kill the company; it just turns it into a corporate vampire: undead, unscalable, and draining the lifeblood of equity investors every quarter.
So going back to our original question - what are we missing? One man’s stubbornness is another man’s grit.