Analysis: AT&T, MetroPCS might purchase Verizon's 700 MHz spectrum

Verizon Wireless' (NYSE:VZ) decision to sell all of its 700 MHz Lower A and B Block spectrum--contingent on regulatory approval of its purchase of AWS spectrum from a group of cable companies--could spark interest from AT&T Mobility (NYSE:T), MetroPCS (NASDAQ:PCS) and others, according to analysts. Meanwhile, critics contend that Verizon's decision to sell its Lower A and B Block licenses undercuts its argument that there is a spectrum crunch.

Although Verizon plans to offer the spectrum to all bidders, there are a limited number of realistic buyers. AT&T is the most likely buyer for the B Block since most of its current 700 MHz holdings are in the B Block. Verizon's B Block licenses cover Chicago, Cincinnati, Los Angeles and Miami, but not too many larger markets. "In our view, this incremental capacity could be critical to AT&T building a more robust 700 MHz LTE infrastructure," wrote Jefferies analysts Thomas Seitz and Kunal Madhukar in a research note.

MetroPCS, U.S. Cellular, C Spire Wireless and an assortment of smaller players all own A Block licenses, and could potentially bid for Verizon's A Block spectrum, which covers more areas than its B Block spectrum.

Verizon "would prefer [the spectrum] to not all go to one buyer," said TMF Associates analyst Tim Farrar. "From that point of view, there's reason to think that a likely outcome is AT&T might buy the B Block and not the A Block. And it would look better if Verizon were selling it to multiple buyers as well."

Another issue that may complicate any sale is one that has bedeviled the A Block since the 2008 700 MHz auction: There remains concerns about interference from nearby TV broadcast stations. Further, as analysts at Stifel Nicolaus pointed out in a research note, Verizon's Lower A and B Block licenses have buildout requirements that mandate coverage to 35 percent of the licensed geographic areas by mid-2013, which could be one reason why Verizon has chosen to sell it now. However, those requirements also put pressure on any carrier that bids for the spectrum. Farrar said Verizon had no intention of deploying its Lower A and B Block spectrum, and with the buildout deadlines approaching, "they're using this to their advantage."

Analysts generally agreed that the proposed sale could help smooth the way for Verizon to get regulatory approval to purchase $3.9 billion worth of AWS spectrum from SpectrumCo, a joint venture of cable companies Comcast, Time Warner Cable and Bright House Networks, as well as Cox Communications. Under the terms of the deals Verizon struck, the cable companies can also become MVNOs of Verizon. "I don't see how it [Verizon's 700 MHz sale] can hurt," said Stifel Nicolaus analyst David Kaut. "I didn't think it was going to get blocked before."

Farrar said Verizon could be worried that the FCC might impose requirements that it wholesale its LTE network to other carriers on the same terms as it will offer the cable companies. "This is their way of trying to get around that issue to avoid the attention," he said. "Clearly they're worried about the whole thing not happening."

The potential sale has also raised doubts about Verizon's previous warnings of a spectrum shortfall. "This announcement confirms what RCA has said: Verizon has developed a spectrum warehouse exceeding its needs," Rural Cellular Association President Steve Berry said in a statement. "It is critical that these licenses are used to fully develop an LTE ecosystem throughout the Lower 700 MHz band."

Farrar pointed out that in the last six months of 2012, according to data from the CTIA, more than 26,000 new cell sites were constructed, compared with around 15,000 cell sites being constructed from the end of 2008 to the middle of 2011. "The spectrum crisis narrative is dissipating," he said, noting that incentive auctions for TV broadcast spectrum have now been authorized. "There's going to be a lot of pressure on that narrative in the next year."

Kaut acknowledged that the critics would have had a stronger argument if Verizon had held onto its A and B Block spectrum. "But at the same time they [Verizon] are willing to give it up," he said. "What it says is they value the AWS spectrum more than this spectrum."

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