With bidding in the AWS-3 spectrum auction winding down, financial analysts think Dish Network (NASDAQ: DISH) is likely going to walk away as a major winner, especially if it can secure paired spectrum licenses in major markets. According to a research note from analysts at New Street Research, that would give Dish leverage over Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T), which have likely spent big at the auction.
In a research note, New Street analysts Jonathan Chaplin, Spencer Kurn, Zach Monsma and Vivek Stalam wrote that at the close of bidding on Friday, the paired spectrum was priced at $2.52 per MHz-POP on average and the unpaired uplink (1695-1710 MHz) was priced at 43 cents per MHz-POP, for total provisional winning bids of $41.5 billion. Those figures align with estimates from analysts at Jefferies.
Analysts have said throughout the auction that Verizon and AT&T are likely going to walk away with chunks--perhaps 10x10 MHz each--of the paired spectrum but are also expected to have paid significant amounts of money, especially for licenses covering the nation's largest metropolitan areas. T-Mobile US (NYSE:TMUS) and smaller carriers are also likely to win smaller licenses. Analysts have said they expect Dish to have bid up prices, especially for paired spectrum (1755-1780 MHz for uplink operations and 2155-2180 MHz for downlink).
"Some investors have argued that it is circular to apply auctions values to Dish's spectrum, given that Dish is very likely driving much of the bidding. Not so," the New Street analysts wrote. "Dish is helping make the auction an effective price discovery mechanism. For any license that is won by a carrier, the winning bid is at least what the spectrum is worth (if Dish had bid again the carrier may have bid higher still). For any license that Dish wins, the bid immediately before the winning bid is what the spectrum is worth to a carrier. Some have suggested that Dish is distorting prices by bidding against themselves (Dish has three bidding entities that can't communicate with each other during the auction). While possible, this is highly, highly unlikely."
The New Street analysts think Dish will likely not have spent any more than $10 billion at the auction in order to keep its debt levels down. If Dish wins paired licenses in "key" markets, the company is in a better position to negotiate with carriers whether Dish wants to deploy the airwaves or sell them, according to New Street.
"If Dish is a seller, Verizon and AT&T will need to buy the spectrum even more urgently," the analysts wrote. "The prices in this auction show that the carriers believe they need more capacity urgently and Dish will have set themselves up as the De Beers of mid-band spectrum. If Dish intends to deploy the spectrum and sell capacity wholesale to the carriers, this business is augmented by owning more spectrum in key markets. Finally, Dish could sell just the AWS-3 licenses they acquire to the carriers at cost in exchange for interoperability across all of the AWS bands (including their AWS-4). As always, there are multiple ways for Dish to create value."
The New Street analysts think Dish will monetize its spectrum holdings either by selling the spectrum to a carrier or by deploying the spectrum in partnership with a carrier and leasing capacity to carriers. Either scenario would benefit from capacity constraints at Verizon or AT&T, they added. Dish already controls 40 MHz of AWS-4 spectrum and 10 MHz of 1900 MHz PCS H Block spectrum.
Interestingly, the New Street analysts do not think Sprint (NYSE: S) will sell its 2.5 GHz spectrum, of which it has an average of 120 MHz across the country. Even though selling around 40 MHz of such spectrum could fetch around $12 billion, they do not think Masayoshi Son, CEO of Sprint parent SoftBank, will push Sprint sell the airwaves, especially because the spectrum is Sprint's key differentiator for network speed and capacity. Referring to Son, they noted that "a man with a 300-year plan shouldn't sell spectrum in a supply-constrained market ever at any price to anyone (it will always be worth more tomorrow)."
In terms of Verizon and AT&T, the New Street analysts think each will wind up spending somewhere in the range of $15 to $20 billion in the AWS-3 auction, increasing their net debt to EBIDTA ratio by around 0.3x. "While manageable for both, the higher capital outlays for spectrum coupled with EBITDA pressure will compress returns on invested capital. The value of the wireless business is clearly under pressure," they wrote. "The best case for the carriers is that they win all of the spectrum. If Dish does win a number of licenses in key markets, the carriers will be in a tough spot strategically."
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