Analysts: AWS-3 auction helps AT&T catch up to Verizon in spectrum ownership in major markets

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.

Related Articles:
AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B
IT'S OVER: FCC's AWS-3 spectrum auction ends at record $44.9B in bids
As AWS-3 auction winds down, attention turns to what happens next
Analysts: Bidding in NYC, LA and Chicago in AWS-3 auction is 94% above average prices
AWS-3 auction inches on, with bids passing $43.7B

Suggested Articles

Dish could announce a $6 billion deal as early as this week for wireless prepaid and spectrum assets from T-Mobile and Sprint, according to Bloomberg.

Apple is exploring options to diversify production after deeming its reliance on China as risky.

Starting this summer, the partners will deploy Ericsson’s 3GPP standards-based 5G New Radio (NR) hardware and software to 82 macro cell sites across Anchorage