Sprint And T-Mobile Put Forward A Case For Merger Through Combined Spectrum Bid

Includes: S, T, TMUS, VZ
by: AH Research


Bigger companies not too bothered by attempt at combined bid by smaller players.

Combined bid not yet a done deal, as FCC could still scrutinize it.

Both VZ and T are also eager to acquire low-frequency spectrum.

Sprint Corporation (NYSE:S) and T-Mobile U.S. (NASDAQ:TMUS) have recently decided to participate in next year's spectrum auction together. The low bandwidth auction is important for telecommunication companies, but I believe that S and TMUS combined bid is not a serious concern for Verizon Communications (NYSE:VZ) and AT&T (NYSE:T).

Spectrum Auction
The Federal Communications Commission (FCC) is expected to conduct a spectrum auction of 600MHz of band next year. This auction is key for telecommunication companies because of its low bandwidth offering. With the low bandwidth waves, telecom companies need to build less cell sites because they cover longer distances than high bandwidth spectrum, which makes it attractive to deploy it in rural areas. Also, they have superior ability to penetrate walls, which enhances its utility in urban centers.

It is more important for smaller players like S and TMUS, as they currently own about 15% of the low bandwidth spectrum, combined. The remaining 34% and 38% is owned by VZ and T, respectively.

The major chunks of low bandwidth waves are held by VZ and T. So, S and TMUS went to the regulatory authorities to restrict the giants from participating in the future spectrum auction. The Department of Justice ruled in favor of the smaller companies and set aside some of the airways for smaller players. But the important thing to note here is that the set aside portion was not large, and remains lower than the expectations of smaller players.

So, S and TMUS have now decided to jointly bid for the spectrum auction. They are expected to raise $10 billion to spend on the auction. If they had participated separately, their bids could not have matched T's and VZ's bids.

Testing the waters for a possible merger
Although the spectrum has its attraction for TMUS and S, I believe the real purpose was to win regulatory support for a merger between the two companies. Both are trying to build a strong case in favor of the merger. By joining together for the auction, the companies are trying to show how they could compete with VZ and T if they combined their resources. I believe this is not a good idea. TMUS has proved by its past performance that it can successfully compete with larger telecom companies as a separate entity. On the other hand, S has the largest spectrum in the industry, but still it failed to deliver strong results.

Craig Moffett, an analyst with MoffettNathanson LLC, makes an interesting remark on this matter." This seems to have less to do with a spectrum ownership strategy than it has to do with a negotiating strategy of two companies that want to merge,"

TMUS and S bidding together for the auction is not a done deal, as the FCC said it might consider further changes in the auction rules for joint bidders.

Moreover, there is a big chance that regulatory bodies might reject the merger, as they have done in the past by rejecting a deal between T and TMUS. The FCC has mentioned previously that it likes the current four players' structure. So, the big question is what would happen with the spectrum if the FCC rejects the deal, as both companies would be directly competing with each other, and it would be difficult to split it later.

The FCC will be considering all these issues before making a final call. So the ball is still up in the air and the decision can go either way.

Furthermore, even if we assume that TMUS and S will be able to jointly bid for the auction. It does not mean that they will be able to win the bid too. T has shown a keen interest in participating in the auction, as it sees limited opportunities in the private space. It is intended to put up $9 billion for the spectrum auction. Similarly, VZ is also eager to get its hands on the spectrum, as it is planning to leverage its network quality to attract subscribers. The NY Post reported last month that VZ is interested in buying DISH spectrum for $17 billion. So, this makes it clear that VZ will be willing to put up as much money as its competitors.

Final words
I don't believe the combined bidding for the spectrum by S and TMUS is a serious concern for bigger companies. Also, the combined bidding for the spectrum is not a done deal, as it might face scrutiny from the FCC. Earnings seasons are coming up for telecom companies, and we can expect more detail by the managements of both companies on this matter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.