Last month, the Office of Communications (Ofcom) released the names of the U.K. 4G spectrum winners. After many rounds of bidding, the ultimate winners included BT Group Plc (NYSE:BT), Vodafone Group Public Limited Company (NASDAQ:VOD), Hutchison 3G U.K. Ltd. (OTCPK:HTCTF), etc. Ofcom expected total revenue of about $5.25 billion, but was able to collect around $3.75 billion only. Even though the revenue generated from the auction was not according to expectations, this spectrum still covers 98% of U.K.'s population. And it should provide $30 billion worth benefits to the users over the next decade.
Vodafone's shares did not responded fairly to this news, even though it has obtained the highest spectrum as compared to its competitors. However, this still puts the company in a strong position for the long run. For BT, the spectrum win provides it an opportunity to complement its existing strategies in broadband and Wi-Fi. Let's discuss these stocks in detail, and find out what all they have to offer besides the new spectrum.
BT Group Plc
One of the most interesting highlights of the spectrum auction was BT's return to mobile. The company's subsidiary, Niche Spectrum Ventures Ltd., acquired 15MHz of paired 2.6GHz spectrum and 20MHz of unpaired spectrum costing around $280 million. Although, it is clear that the company will not build a nationwide network, it will be in a good position to offer a mobile based Internet service with the scope to bring high-traffic in areas where it is feasible to do so. Many of the mobile assets that require these services are already in place. This means a low-capital, high-return opportunity that can help the business to grow in the medium-term.
In the nine months ended December, 2012 BT incurred about $42 million on restructuring charges. As a result it was able to reduce underlying operational expenses by 7% year-over-year. Under the program, the company united two of its segments BT Operate and BT Innovate and Design into one. The new segment will be responsible for designing and testing the company's networks and systems on end-to-end basis. The restructuring may require a few hundred million dollars in the fourth-quarter and fiscal 2014, but this plan should allow it sustain the current impressive cost reduction for the next two years.
Moreover, Barclays Plc (NYSE:BCS) has announced its contract with BT to provide free Wi-Fi service to Barclays' customers. This deal will cost around $750 million to Barclays. BT will start providing free Wi-Fi in the coming couple of months and will cover around 1500 branches of the bank all over the UK. This initiative by Barclays may attract customers in the coming times. On the other hand, this gives transparency to BT's revenue and earnings, as this contract will last for the next seven years.
Among the winning bidders of Ofcom, Vodafone acquired the maximum paired spectrum. It acquired 10MHz of paired 800MHz spectrum, 20MHz of paired 2.6GHz spectrum and 25MHz of unpaired 2.6GHz spectrum. Apart from this, Vodafone's increasing inclination towards Europe and its reducing interest in the US is apparent from its new investment in Spain and probable disinvestment in the US.
Vodafone may exit from its joint venture with Verizon Communications Inc. (NYSE:VZ) thereby exiting from the U.S. as well. In the joint venture of these two companies, Vodafone holds 45% stake and Verizon holds the rest. Vodafone's stake in the JV is valued at around $115 billion. There is a possibility of a buyout or partial sale of the company's 45% stake. This deal should enhance Verizon's existence in the domestic market and would provide it better control on its profitable division. The probable deal follows the recent agreement of Verizon Wireless to sell spectrum licenses worth $1.9 billion to AT&T Inc. (NYSE:T). The joint venture had a nice year; it added about 2.1 million subscribers in the last quarter itself and had an operating margin of over 40%.
At the same time, this deal will provide liquidity to Vodafone, which it can utilize to make strategic acquisitions in Europe to strengthen its position in the region. In the venture, Vodafone didn't have the controlling rights and Verizon blocked dividend payments in the past couple of years with an exception of last year. Hence, Vodafone is better-off than owning an asset that it could not control.
The proceeds from the sale of its stake in Verizon Wireless could be used in acquisitions and deals like the one with France Télécom's (FTE) Orange. To increase its presence in Spain, and thereby increase the revenue from that country, both the companies have agreed to co-invest about $1.3 billion in a fiber-optic broadband network. The service will be available by early next year. The network is expected to reach about 6 million customers in 50 cities. Although the weakness in the Spanish market along with Europe as a whole is not hidden; surprisingly, the broadband subscribers in the country are growing. For the three-months ending December, 2012 the growth was 3.7%. Also, Spain has more broadband coverage than most of the big European countries and the fiber network is relatively less developed in comparison to the rest of Europe. This gives an opportunity to Vodafone to achieve the targeted customers.
The newly acquired spectrum at a lower-than expected price should surely help BT and Vodafone in the future. I recommend a buy for both the stocks.
Although BT won't be using the spectrum as a nationwide network, it will help it in providing mobile broadband services. Additionally, its deal with Barclays and restructuring plan gives the stock a strong future.
Similarly, Vodafone with the maximum spectrum will be able to boost its LTE expansion leading to additional revenue. Also, the increasing tilt towards Europe and probable exit from the U.S. will lead to more opportunities in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.