Why EchoStar Rocketed Higher in August

Key Points

• EchoStar sold a tranche of wireless spectrum to AT&T for $23 billion.

• The transaction wiped out EchoStar's debt and highlighted the hidden value of its spectrum assets.

• As the calendar flipped to September, EchoStar made a $17 billion transaction with SpaceX, taking $8.5 billion in the company's shares as part of it.

• 10 stocks we like better than EchoStar ›

Shares of satellite broadband and wireless company EchoStar (NASDAQ: SATS) rallied a whopping 89.6% in August, according to data from S&P Global Market Intelligence.

EchoStar abruptly went from a distressed, debt-ridden company to a debt-free entity when it agreed to sell some of its wireless spectrum to AT&T (NYSE: T) on Aug. 26. That transaction was enough to essentially wipe out EchoStar's net debt, while also leaving additional spectrum it could monetize -- which EchoStar proceeded to do in September.

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$23 billion in August, another $17 billion in September

EchoStar had come into August under a cloud of uncertainty. Its legacy satellite cable business is in decline, while EchoStar was attempting to build a competitive wireless business to challenge the big three telecom giants.

Earlier this year, the Federal Communications Commission (FCC) sent EchoStar a letter saying it was reviewing its wireless spectrum licenses, accusing EchoStar of slow-walking its wireless rollout and thus "spectrum hoarding." Thus, it wasn't clear that EchoStar would be able to continue building its network, or whether the government might seize the spectrum or buy it back at cost.

It appears EchoStar concluded that it should sell the spectrum and release it back for its wireless ambitions in order to relieve the pressure. And it appears the market missed the underlying value of those assets.

On Aug. 26, EchoStar inked a deal with AT&T to sell 50 MHz of low and mid-band spectrum for a whopping $23 billion. That figure was basically the entire amount of EchoStar's net debt at the time, while EchoStar also held additional assets it could sell. As part of the announcement, EchoStar said it would continue to grow its wireless business by leasing the spectrum from AT&T in a wholesale agreement.

The agreement essentially amounted to a sale-leaseback arrangement that allowed EchoStar to continue marketing its wireless services, while also being able to sell the spectrum at a much higher price than investors had apparently contemplated.

Image source: Getty Images.

And the trend continues in September, with a sale to SpaceX

After August, there are still big questions hanging over EchoStar's operating businesses, with a declining satellite cable and broadband business, along with a small-scale wireless service it's attempting to grow.

But in September, EchoStar made another attractive deal that further diversifies its business by becoming a significant SpaceX shareholder. On Sept. 8, EchoStar announced it was selling another tranche of spectrum to Elon Musk's SpaceX for $17 billion. Instead of 100% cash, SpaceX agreed to pay EchoStar $8.5 billion in cash and deliver $8.5 billion worth of SpaceX stock to EchoStar shareholders. As in the other deal, EchoStar will sign a long-term agreement that will give its Boost mobile customers access to SpaceX's Starlink direct-to-cell service.

As a result, EchoStar says it has resolved all the outstanding inquiries from the FCC. Furthermore, EchoStar still has some other spectrum licenses it can sell in the future, although its August and September sales amounted to the larger licenses it owned.

Needless to say, with a clean balance sheet, SpaceX ownership, and new communications services it's trying to build, EchoStar is a transformed company from what it was as recently as July.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.