In Search of Spectrum, Verizon Beats 'Em To the Punch
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Verizon (NYSE: VZ) has received the much-needed approval from the Justice Department to buy spectrum from several cable companies for $3.6 billion. The approved agreement is a boon for Verizon for several reasons, with the main reason being it allows Verizon to stay a step ahead of its main competitors AT&T (NYSE: T) and Sprint (NYSE: S).
Spectrum has just about become a commodity. Demand for the valuable resource that allows your smartphone and tablet to do such things as stream movie has increased exponentially. Wireless carriers, and even satellite TV providers, are finding that it behooves them to quickly find it and buy it.
For Verizon, this nearly $4 billion deal means it will gain ownership of one of the very last large blocks of unused wireless spectrum in the country! This is a classic case of beating your competition to the punch. Through an interesting and complex chain of regulatory events, cable companies ended up with the bulk of spectrum. While some of them had grand goals of using it to offer their own wireless services, those ideas were abandoned, and so was the spectrum – until now.
By grabbing this critical spectrum before others, Verizon has further solidified its efforts to remain the go-to wireless carrier, and the largest wireless carrier in the country.
While the Justice Department’s blessing is definitely a boon for the wireless carrier, the trickle-down effect will likely uplift T-Mobile too. T-Mobile is a small, but meaningful, player in the wireless market. As part of the approval, Verizon will give some of the spectrum to T-Mobile. This was not a matter of just being nice to T-Mobile. In a way, it was a deal sweetener because the Justice Department had expressed concerns over the deal and any antitrust infractions that may arise.
To fill its spectrum needs, AT&T is buying NextWave Wireless. Sprint is selling $1.5 billion of notes to fund Clearwire, and its subsidiary, Clearwire Communications for its spectrum.
As these companies make these transactions, attention should be paid to how their margins are being affected. Verizon’s operating margin (18%), is in line with AT&T (14%) and Sprint (1%). As carriers search for ways to get a hold of more spectrum, these margins will be affected. Like Verizon, they are all trying to build out their wireless networks to be able to provide the next generation 4G LTE.
At the end of last year, Verizon announced it had entered into an agreement with SpectrumCo to buy the spectrum from Bright House Networks, Comcast., Cox Communications, and Time Warner Cable (NYSE: TWX). Under the agreement, Verizon will pay Comcast Corp. $2.3 billion for the 63.6% of licenses it owns in SpectrumCo. The wireless giant will pay Time Warner Cable $1.1 billion for its 31.2% stake in the company. Bright House Networks, which owns 5.3% of SpectrumCo would get about $189 million.
To give you another example how important the almighty spectrum is, satellite TV provider Dish Network (NASDAQ: DISH) has also been buying it up. It wants to get into the wireless mobile business. It is considering teaming with a wireless carrier to help it do so. Last week, the Denver Business Journal reported that Dish TV CEO Charlie Ergen discussed a deal it has pending before the FCC that would allow it to purchase more spectrum. Ergen has worried about the Verizon deal being approved before Dish’s because it would put it at a disadvantage. Below is what Ergen said to the Denver Business Journal; I think this sums up the challenges companies are facing over spectrum and wireless mobile services.
"The only problem I see with the time that has gone by is that it's become increasingly risky for us to try to go it alone," Ergen told the Denver Business Journal. That process takes more than three years, and there's not any way to make that go faster, so we're probably going to lose that time-to-market advantage, because while we're handcuffed, AT&T and Verizon are continuing to plan and put in ways they can build that out before we can get there."
It seems the wisest choice for Dish would be to go with Sprint, which is the third largest wireless carrier in the country. For now, the Sprint's worries are not about getting more spectrum, but are about keeping Clearwire under its thumb for its spectrum.
Continue to watch the spectrum moves in the wireless space because they will affect the financial bottom lines of players in this industry. I wouldn’t predict who will fall first because they don’t have the spectrum to compete. However, I do see more mergers and acquisitions in the future, so the issue will become federal regulations continuing to work against any of these companies becoming a monopoly.
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