RPT-BREAKINGVIEWS-Charlie Ergen’s rocket ride reaches its vertex

By Jeffrey Goldfarb

NEW YORK, April 7 (Reuters Breakingviews) - Reentering planetary atmosphere is the scariest part of a rocket ride. Charlie Ergen's EchoStar satellite business has enjoyed a turbo boost since agreeing to swap assets for a stake in Elon Musk's SpaceX late last year. Its trajectory suggests the dangerous next phase of the journey awaits.

After years of amassing wireless spectrum licenses for a promised nationwide 5G network, Ergen ran out of time. Under pressure from the Trump administration to use it or lose it, the satellite mogul started dismantling his company by striking multiple deals to sell most of its spectrum cache to AT&T T.N and SpaceX for about $42 billion.

Those transactions effectively turned the company into a cash-stuffed hedge fund. Its remaining Dish Network pay-TV business, Hughes satellite operation, Boost mobile network and Sling TV streaming service are either fading fast or also-rans in their respective industries. They probably amount to no more than $10 billion of combined enterprise value.

By contrast, accepting SpaceX stock worth about $11 billion last November now looks smart. Under the terms of their two deals, SpaceX shares were valued at $212 apiece, suggesting that Ergen's outfit would receive about 52 million of them. Musk later merged the rocket business with his own xAI artificial intelligence firm and decided the combined company was worth $1.3 trillion. The shares now fetch $609 on Nasdaq Private Market, implying $32 billion for EchoStar's SATS.O stake. The sum is equivalent to about 90% of the company's entire market value.

The rocket could rise even further. EchoStar's stake implies that SpaceX is worth more than $1.4 trillion. Yet Musk's company has boosted its target valuation to more than $2 trillion ahead of the IPO, Bloomberg reported on Thursday, indicating upside for EchoStar investors. This simple logic overlooks certain holes, however.

First, EchoStar's SpaceX deal has yet to close. A regulatory roadblock, however unlikely, would leave Ergen seeking a different buyer for the spectrum. SpaceX may also be overreaching. The mooted price tag implies a valuation of more than 100 times revenue for the Starlink owner in a jittery stock market. EchoStar shares may also be benefiting from the limited routes for ordinary investors to gain exposure to SpaceX before the IPO.

The biggest concern, however, is Ergen himself. His spectrum shopping spree lasted 12 years and only crystallized under duress. He controls 90% of EchoStar's voting power, according to last year's proxy statement, meaning he could easily use any SpaceX proceeds to fund another wild investment ride, rather than share the spoils with EchoStar stockholders. There are more than enough reasons to suspect the most likely direction from here is down.

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CONTEXT NEWS

SpaceX filed confidentially for an initial public offering, multiple media outlets reported on April 1, citing unnamed sources.

The rocket-maker and artificial intelligence developer has enlisted at least 21 banks to work on the share sale, with Morgan Stanley, Goldman Sachs, JPMorgan, Bank of America and Citigroup serving as active bookrunners, Reuters reported on March 31, citing unnamed sources.

The market debut of the company controlled by founder and CEO Elon Musk is targeting a valuation of $1.75 trillion. Other banks involved, according to Reuters, are: Allen & Co, Barclays, BTG Pactual, Deutsche Bank, ING‌, Macquarie, Mizuho, Needham & Co, Raymond ⁠James, Royal Bank of Canada, Societe Generale, Banco Santander, Stifel, UBS, Wells Fargo and William Blair.