Credit rating agency, Moody’s Investors Service has put the U.S. based satellite service provider, Dish Network Corp. (DISH - Free Report) on review for a possible downgrade. This decision by the agency is in response to DISH’s proposal to acquire Sprint Nextel Corp. (S - Free Report) , the third-largest wireless carrier in the U.S., for $25.5 billion.
DISH has proposed to pay $7 per share, which includes $4.76 in cash and 0.05953 of DISH share for every Sprint share. This recent offer from DISH counters Japanese telecom carrier, SoftBank Corp.’s bid to buy 70% of Sprint’s stake for a total consideration of $20.1 billion.
Currently, DISH Network holds a Ba2 corporate credit rating from Moody’s, which places the third-largest U.S. satellite provider into junk category. Moody’s has announced that it will evaluate the strategic synergies and the related growth opportunities for DISH from the acquisition, before assigning any outlook on the company.
The rating firm also said that it will scrutinize the financial risk of DISH from the acquisition, which includes assessing the leverage and liquidity position of the standalone company as well as that of the combined DISH-Sprint entity. Shareholders reacted negatively as the stock fell 1.6% in the aftermarket trade on Tuesday to close at $37.32.
If downgraded, this will be the second major setback for the company in quick succession as recently Standard & Poor’s Rating Services (S&P) lowered its outlook on the company to Stable from Positive. The rating agency cited growing leverage of DISH coupled with uncertainty related to its wireless venture, as the primary reasons for this downgrade.
DISH Network argued that the proposed acquisition will allow it to provide triple-play services by combining its satellite network with Sprint’s wireless network. Additionally, it will be able to counter stiff competition from market leaders AT&T Inc. (T - Free Report) and Verizon Communication Inc. (VZ - Free Report) , which dominate nearly 35% of the U.S. market.
However, DISH already possesses a highly leveraged balance sheet and fiscal 2012 with an enormous $11.6 billion in long-term debt. Recently, DISH Network raised $2.3 billion debt from the market.
The acquisition will further aggravate its debt position to $27.7 billion, which will increase the financial risk for the company in terms of higher interest payments and increased leverage. We believe that accessing the debt market to fund the acquisition might worsen its leverage position further, which in turn might affect its ratings.
Currently, DISH Network has a Zacks Rank #3 (Hold).