T-Mobile US (NYSE:TMUS) likely won't have the financial backing of its parent company Deutsche Telekom in next year's incentive auction of 600 MHz broadcast TV spectrum, according to financial analysts at investment bank Macquarie.
In a research note, Macquarie analysts Kevin Smithen and Will Clayton wrote that "we continue to believe that DT will not fund T-Mo's participation in the incentive auction and that this could become a small overhang on T-Mo shares if the auction somehow happens in 2016."
That should not entirely come as a surprise. On T-Mobile's fourth-quarter earnings conference call, T-Mobile CFO Braxton Carter said the company expects to finance its bidding in the incentive auction through "existing cash plus debt" and that the company has "no plans" to sell additional equity, according to a Seeking Alpha transcript of his remarks.
The issue is likely going to take on added significance in the near future. The Macquarie analysts note that on April 28, Deutsche Telekom has the right to sell $2.5 billion of the $5.6 billion in intra-company debt it holds. For T-Mobile, this so-called "reset" will trigger an increase in interest rates from 5.6 percent to an estimated 6.75 percent, according to the analysts.
Meanwhile, the Macquarie analysts note that DT's management has consistently indicated that it would like to reduce its capital allocation to the U.S. business over time. "We believe that DT will most likely sell its debt to the open market over the next few months," they wrote, noting there is another $2.5 billion "reset" coming in October. "Following improvements in DT's European business and share price, we believe that DT could be patient with the equity and could take [Dish Network] or [Sprint] paper, in the event of a transaction with significant synergies."
Given T-Mobile's focus on free cash flow generation this year, the analysts wrote that they expect T-Mobile will refinance a portion or all of the "reset" debt in order to avoid an additional $50 million or more in interest costs in 2016.
T-Mobile, Sprint (NYSE: S) and Dish Network (NASDAQ: DISH) have been pushing for the FCC to reserve up to 40 MHz of spectrum for smaller carriers to bid on in the incentive auction, which is currently scheduled for early 2016. The current reserve is capped at 30 MHz, but the smaller carriers argue that if it is not increased only one carrier will be able to secure a 10x10 MHz block of spectrum in a given market with the reserve spectrum.
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