Thanks to its $18.2 billion in new AWS-3 spectrum, AT&T Mobility (NYSE: T) has caught up to Verizon Wireless (NYSE: VZ) in spectrum ownership in major markets, according to analysts. "We estimate that AT&T and Verizon are in general parity in terms of paired low- and mid-band spectrum assets in the top 20 markets (~120 MHz), with AT&T spending $18 billion to Verizon's $10 billion," Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note.
The AWS-3 auction closed last week and AT&T spent $18.2 billion for a nationwide 20 MHz block of spectrum. Verizon bid $10.4 billion in the auction.
The Jefferies analysts think AT&T outbid all other companies for two main reasons. The most obvious one was to help "replenish spectrum forfeited as part of the failed T-Mobile acquisition" and also because of "the limited strategic alternatives, particularly with Dish (NASDAQ: DISH) given the pending acquisition of [DirecTV (NASDAQ: DTV)]."
"Verizon on the other hand focused on improving the uniformity of its portfolio, and now only has two top 20 markets with less than a 100 MHz position," they added. "We see T-Mobile's (NYSE:TMUS) gains as minimal, only spending $1.8 billion, and believe the company is executing the right strategy in purchasing 700 MHz A Block spectrum on the secondary market, and saving for the upcoming [600 MHz incentive] auction."
AT&T won the 10x10 MHz paired J Block in just over half of the country and supplemented that with 5x5 MHz H and I Block licenses and a few 5x5 MHz G Block licenses, New Street noted. AT&T has said it will work with network and handset suppliers and industry standards bodies to deploy the spectrum beginning in the 2017-2018 period, and will use it for supplemental downlink capacity.
T-Mobile bid $1.77 billion, below analysts' expectations of $2 billion to $3 billion. U.S. Cellular (NYSE:USM) was the fifth-largest bidder at $338.3 million gross bids.
When taking into account discounts, the auction generated $41.329 billion in net proceeds. New Street Research found that AT&T, Verizon, Dish and T-Mobile accounted for the lion's share of that amount. The firm said the rest of the auction's bidders produced net total bids of $941 million, or just 2.27 percent of the total.
According to analysts at Jefferies and New Street Research, the paired spectrum in the auction (1755-1780 MHz for uplink operations and 2155-2180 MHz for downlink) sold for an average of $2.71 per MHz-POP, well above what analysts had expected before the auction began Nov. 13. The uplink spectrum, the 1695-1710 MHz band, on average sold for much less at an average of 52 cents per MHz-POP.
"The auction results demonstrate that carriers value wireless capacity at multiples of what investors thought prior to the auction," New Street analyst Jonathan Chaplin wrote in a research note. "This is obviously good for owners of marginal capacity, like Dish and Sprint (NYSE: S); however, it is also good for the towers (their pricing power should improve markedly)."
Still, Chaplin noted that he remains cautious about both AT&T and Verizon. "They increased their share of industry capacity by just 2% collectively to 38%," he added. "This compares to industry revenue share of 73%. If capacity utilization approaches 100% as we think it will, these carriers either have to find a great deal more spectrum or relinquish a great deal of revenue share."
"AT&T was the big winner, spending over $18B to acquire a near nationwide portfolio (96% of the U.S. population)," Credit Suisse analyst Joseph Mastrogiovanni wrote in a research note. "Verizon spent $10.4B to help fill in some holes, but missed out on some major markets like New York City, Boston and Chicago. While it has been expected that Dish would be a significant player in this auction, we believe its final total came as a surprise to most investors."
"Finally, T-Mobile was a relatively light participant, as was largely expected," Mastrogiovanni continued. "We expect T-Mobile to be more aggressive in the Broadcast Incentive Auction (low band 600 MHz spectrum), but the company has been diligent in filling-in its low-band portfolio in the secondary market. We believe T-Mobile comes out of the auction with the most attractive prospects, as the company could become an acquisition target for Dish or a partner."
Dish acquired around 25 MHz of spectrum, including 13 MHz of paired spectrum, and some analysts think that Dish might try and strike a deal to lease its capacity to Verizon. "We view the lower spending by Verizon as a function of the company's higher quality mid-band portfolio, and optionality to engage in a strategic transaction with Dish," the Jefferies analysts wrote. "Also working to its advantage was that the company already held a strong spectrum position in the New York City market where the 10x10 MHz J Block sold for $2.8 billion."
See below for maps of who bought what in the AWS-3 auction. These are from Credit Suisse and Wiley Rein. Click on any of the maps for a larger version.
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