Verizon Wireless (NYSE:VZ) agreed to sell its lower 700 MHz A Block spectrum to T-Mobile US (NYSE:TMUS) for $2.365 billion in cash, capping months of feverish speculation over whether the carriers would strike a deal for the airwaves. The deal also includes the companies' previously announced AWS and PCS spectrum licenses, which T-Mobile said have a total estimated value of approximately $950 million.
Click here for key slides from T-Mobile's investor presentation on the spectrum purchase.
As part of those transfers and swaps, Verizon will receive AWS spectrum in 19 markets covering 34 million POPs and PCS spectrum in eight markets covering 21 million POPs. The agreements are subject to approval by the FCC and the Department of Justice, and T-Mobile said that following regulatory approval, it expects the deals to close in mid-2014.
At its heart, the A Block deal is about giving T-Mobile a leg up in low-band spectrum holdings below 1 GHz, where Verizon and AT&T (NYSE:T) currently have overwhelmingly strong portfolios compared with other carriers. Low-band spectrum can propagate farther, giving T-Mobile's network a potential coverage boost and better in-building penetration. T-Mobile said the spectrum, which it will use for LTE, would lead to increased gross subscriber additions, lower churn and a reduction in future capital expenditures.
T-Mobile said the transactions, combined with its existing A Block holdings in the Boston metro area, will result in T-Mobile having low-band spectrum in nine of the top 10 and 21 of the top 30 markets across the United States. Combined with its existing Boston A Block holdings, T-Mobile said it will have low-band spectrum covering approximately 158 million POPs, including Atlanta, Dallas, Detroit, Houston, Los Angeles, New York City, Philadelphia and Washington, D.C. T-Mobile said the spectrum covers 70 percent of its existing customer base.
T-Mobile said it expects to roll out service and compatible handsets on this A Block spectrum as early as the fourth quarter of 2014.
During a conference call with investors, T-Mobile CEO John Legere said that the spectrum T-Mobile is giving to Verizon won't impact T-Mobile's ability to build out 20x20 MHz LTE, as the carrier has said it will do this year. He also described T-Mobile's purchase of A Block spectrum as just part of T-Mobile's efforts to acquire low-band radio waves--T-Mobile plans to participate in the FCC's 600 MHz spectrum auction and also expects to purchase additional A Block licenses from other wireless carriers.
Interestingly, T-Mobile CTO Neville Ray said that AT&T's recently announced agreement for 700 MHz interoperability makes the A Block licenses much more valuable and easier to deploy. He added that the licenses represent T-Mobile's first low-band spectrum purchase.
Legere also said that, in the wider view, T-Mobile's acquisition of Verizon's A Block licenses give the carrier the ability to more effectively compete against AT&T and Verizon in a wider range of markets than it previously could.
There are some obstacles in deploying wireless service on the A Block, including possible interference from channel 51 broadcast TV spectrum, which sits adjacent to the A Block. T-Mobile said its A Block buildout can start in 2014 outside the channel 51 service areas, with more than 50 percent of the covered A Block population in such areas. The carrier also said initial markets where channel 51 is not present include Dallas, Houston, Miami, Minneapolis, Philadelphia, and Washington, D.C. , and that it has around 15,000 cell sites outside of channel 51 areas. "These interference issues will be fully resolved in the near to mid future," promised T-Mobile's Legere, explaining that FCC actions and other network solutions will help alleviate possible interference.
Additionally, T-Mobile said that A Block network infrastructure has already been developed and deployed, notably by U.S. Cellular. The carrier also noted that its rapid buildout of LTE in 2013--from zero to more than 200 million covered POPs in less than nine months--shows it can move quickly. "We won't be sitting on this spectrum," Ray said of T-Mobile's new 700 MHz licenses.
A deal between Verizon and T-Mobile seemed likely amid reports in November and December that T-Mobile was interested in acquiring the A Block. Verizon Communications CEO Lowell McAdam indicated in December that the company would be open to a spectrum swap to get a deal done, and Verizon executives in general made clear they were open to parting with the A Block at the right price. Verizon paid $2.4 billion for its A Block licenses during the FCC's 700 MHz auction in 2008. T-Mobile raised $3.8 billion in debt and stock sales in November to fund its planned spectrum purchases.
"While T-Mobile is paying a 26% premium to the price that VZ paid at auction, the premium is being paid in spectrum," noted New Street Research analyst Jonathan Chaplin in a note to investors. "As such, it will have little impact on funding needs or the capital structure; were TMUS to pay the same premium for the remainder of the 700MHz-A Block, they would only spend ~$300MM more cash than we expected."
Chaplin wrote in a research note last month that if T-Mobile were to buy A Block spectrum from Verizon, T-Mobile would then likely seek to score other 700 MHz A Block licenses from carriers besides Verizon. Chaplin said T-Mobile could spend an additional $1.6 billion to $2 billion in this pursuit.
In terms of its current LTE network, T-Mobile said it is deploying 10x10 MHz LTE in 43 of the top 50 metro areas and it is "commencing substantive deployments" of 20x20 MHz LTE in 2014. Wider channels typically support faster speeds and more capacity. T-Mobile said its LTE network currently covers around 209 million POPs in 273 metro areas, up from a previous coverage tally of 203 million POPs.
Finally, during the call, Legere addressed a question about industry consolidation. He declined to provide much comment, but reiterated that T-Mobile expects additional consolidation at some point. The comments are notable considering SoftBank has been rumored as interested in merging T-Mobile with its Sprint.
- see this T-Mobile release
- see T-Mobile's investor presentation (PDF)
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Article updated Jan. 6 with additional commentary from T-Mobile's conference call with investors.