U.S. Wireless Carriers Expand Capacity to Attract Data Hungry Customers
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The extensive and growing use of smartphones by American customers, such as Apple's (NASDAQ: AAPL) iPhone, has taxed the cellular phone system's capacity, especially in such high use areas as Manhattan and Chicago's Loop. In response to this, the United States Federal Communications Commission (FCC), the primary regulatory authority for telephone service in the U.S., recently granted permission to certain holders of unused airwave spectrum to sell their shares to wireless communications companies, provided they receive approval for the sale by the FCC and clearance from possible anti-trust violations by the United States Department of Justice. The wireless carriers use the purchased spectrum to boost their voice and data capacity for smartphone service.
Vodafone, PLC (NASDAQ: VOD), the worldwide telecommunications giant, is primarily represented in the American market through its holdings in Verizon Wireless (privately held as Cellco Partnership d/b/a Verizon Wireless). VOD owns 45% of Verizon Wireless with the remaining 55% held by Verizon Communications, Inc. (NYSE: VZ). As such, VOD is a major player in the U.S. wireless communications market—even though the Vodafone name is not well known among American consumers—because Verizon Wireless is, by far, the largest cell phone company in the United States with almost 110 million subscribers.
On Wednesday, August 22nd, Verizon Wireless received unanimous approval from the five-member, bi-partisan FCC to purchase unused airwave spectrum from cable television companies Comcast Corporation (NASDAQ: CMCSA) and Time Warner Cable, Inc. (NYSE: TWC). Verizon Wireless paid US$3.6 billion to the two cable companies for the spectrum. The deal had been previously approved by the U.S. Department of Justice on August 16th. Verizon Wireless and the cable companies first proposed the deal to the FCC in December 2011. CMCSA will receive $2.3 billion, TWC approximately $1.1 billion, and Bright House Networks will receive $189 million. A part of the sale to Verizon Wireless also included a small part of the spectrum owned by Bright House Networks (privately held). In order to get approval of the deal, Verizon Wireless had to agree to market the cable television companies' products in Verizon Wireless stores in order to ensure that strong competition continues in the market for cable company products.
In an entirely separate deal, Cox Communications, Inc. (privately held) has also agreed to sell part of its airwave spectrum to Verizon Wireless for $315 million. Verizon Wireless has, in turn, agreed to re-sell part of the spectrum to T-Mobile USA, Inc. T-Mobile, the smallest of the four major U.S. nationwide cell phone carriers, is a fully-owned subsidiary of Deutsche Telekom, A.G. (Frankfurt Stock Exchange: DTE).
The approved deal has profound implications for the value of VOD. As more and more consumers in the United States upgrade their mobile phones to smartphones, VOD, through Verizon Wireless, is now in position to make sure that those consumers have a good experience. Verizon Wireless is in a particularly good position to exploit its purchase of additional wireless spectrum not only because it is already the largest wireless carrier in the United States, but also because it is the mostly highly regarded wireless carrier by most American consumers. Even the small wireless companies that run off of the Verizon Wireless network advertise that they run on "America's largest and best network" without mentioning Verizon Wireless by name—yet American consumers know exactly who they are talking about. Furthermore, none of the other three major wireless carriers in the U.S. have been able to negotiate similar deals nor are any in the pipeline. For at least the near future, VOD's Verizon Wireless has the expanded spectrum all to itself.
For VOD shareholders, the company's ownership of Verizon Wireless directly translates into better dividends immediately and over the long-term. Investors should note that VOD paid a special dividend in 2011 which they directly attributed to the good performance of Verizon Wireless. Market analysts have almost universally agreed that VOD would have been unable to pay any dividend to its stockholders in recent years without its income from Verizon Wireless. By purchasing a broader piece of the airwave spectrum, Verizon Wireless is assuring VOD that it will remain a leader in the American wireless communications market and, therefore, ensure increased earnings for VOD and continued good dividend payments to its shareholders in the future.
As seen in the chart below, VOD's price in 2012 had generally been holding in the $26.10 to $28.10 range, but beginning in mid-June, a generally upward trend in the price began. Furthermore, after it became known around that time that it was generally believed that the FCC would approve Verizon Wireless' purchase of additional parts of the airwave spectrum, VOD began to trade $1 to $3 dollars higher, a level that it has continued to maintain this month.
I believe, therefore, that now is a good time to invest in VOD. The company is highly dependent on its American holdings in Verizon Wireless in order to pay a dividend, but Verizon Wireless has now positioned itself to continue its leadership in the huge U.S. wireless market. Verizon Wireless has—unlike other U.S. cellular carriers—managed to position themselves to better exploit the expanding consumer demand for smartphones, and that means one thing for holders of VOD stock: better income and value, both now and in the long term.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Vodafone Group Plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.