T-Mobile's $420M price tag for Chicago's 700 MHz may not point to 600 MHz auction values: analysts

T-Mobile reportedly will pay $420 million for 12 MHz of 700 MHz A Block spectrum in Chicago -- far more than the $250 million to $300 million UBS valued it at -- despite the fact that T-Mobile was the only legitimate prospective bidder for those airwaves. 

The deal will enable T-Mobile to offer its "Extended Range LTE" using 700 MHz spectrum in every one of the top-ten markets in the U.S. But whether that transaction is a harbinger of bidding in the upcoming incentive auction of 600 MHz airwaves is still anyone's guess.

As Walter Piecyk of BTIG Research observed in a research note, Verizon originally purchased the Chicago spectrum at auction in 2008 for $153 million, or $1.23/MHz/POP.

"At the time the A-Block was valued much lower than the neighboring B-Block licenses because of interference concerns," Piecyk noted. "AT&T further impaired the value of this spectrum by using Band 17 in its networks and phones, which excluded the A-Block spectrum and stunted the development of the A-Block ecosystem."

But Mignon Clyburn, who was acting FCC Chairwoman at the time, brokered a deal in 2013 to force the interoperability of A-Block spectrum. The move lifted the value of the entire A-Block, BTIG observed, which Verizon owned most of -- and did nothing with.

"Less than a year after the FCC approved the sale of Verizon's spectrum to T-Mobile at a profit despite Verizon having made no effort to build out this spectrum six years after buying it," Piecyk wrote. "In fact, the FCC extended the buildout requirements for the A-Block by 3 years, even though Verizon had owned the spectrum for 5 years and not built anything on it."

That echoes a charge T-Mobile has repeatedly leveled against Verizon since its $2.4 billion deal to buy lower 700 MHz A-Block spectrum in 19 markets from the nation's largest mobile network operator more than two years ago.

"We executed an extremely efficient rollup of that 700 MHz spectrum," T-Mobile Braxton Carter said just last week during an analyst event. "We started calling these broadcasters (regarding interference concerns) and they go, 'Wow, no one's ever called us before. You're the first to call. Of course we'd like to work with you.'"

The deal may not be a meaningful signal of how carriers value the 600 MHz airwaves the FCC is set to begin auctioning off in the coming weeks, however. T-Mobile's lack of 700 MHz in Chicago appears to have been a primary reason the carrier's network wasn't as fast as its competitors in recent speed tests by the network-measurement company Ookla, UBS said. So the move enables T-Mobile to fill in gaps in its nationwide low-band footprint while it catches up to its rivals in a major U.S. market.

Spectrum in the 600 MHz band was once considered a "beachfront" given its propagation characteristics, but the value of mid-band spectrum appears to have risen recently because of its ability to provide increased capacity. And while T-Mobile executives have said recently they hope to be able to use some incentive auction spectrum by the end of 2017, those airwaves likely won't be available in urban areas until TV broadcasters are repacked and moved to other bands -- a process scheduled to take 39 months and that may take even longer.

It's no wonder, then, why T-Mobile placed such a premium on the 700 MHz spectrum in Chicago, BTIG said. But the firm said T-Mobile will likely also want mid-band spectrum, like the kind Dish Network owns, and could pay more for that spectrum than it would for 600 MHz spectrum.

"The spectrum that (T-Mobile) purchases in the upcoming incentive auction will not be usable for many years and based on simple time value calculations (math) should be worth less," Piecyk observed. "Wireless operators value mid-band spectrum more than low-band spectrum given the need for capacity and the ability to easily use mid-band spectrum in all of their cells and a growing number of small cells…. We believe Dish will be an attractive source of that spectrum which T-Mobile could target in 2017 after the conclusion of the incentive auction and in the middle of a year in which we expect it to generate $3 billion of free cash flow. We believe that spectrum will likely cost more than they paid for this low-band spectrum."

For more:
- see this T-Mobile announcement
- read this BTIG research note

Special Report: 600 MHz incentive auction primer: Who will bid, when it will happen, how it will work, and how much money it will raise

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