T-Mobile Makes Waves In Anticipation Of Upcoming Low Band Spectrum Auction

Jul.24.14 | About: T-Mobile US, (TMUS)

Summary

FCC has partially restricted bidding power of VZ and T in upcoming auction.

Joint bid by TMUS and S will help the two acquire meaningful spectrum holding.

Joint bid might strengthen TMUS and S merger case.

The U.S. Telecom Industry has been going through secular changes, as companies are facing drops in their wireline revenues, whereas wireless revenues have been fueling top and bottom line growths. Also, competition in the industry has significantly increased in the recent past, and companies are enhancing and expanding their network coverage to compete more efficiently. As the industry environment remains competitive, T-Mobile (NASDAQ:TMUS) is looking to enhance its low band spectrum footprint.

According to recent news, TMUS and Sprint (NYSE:S) are planning to jointly bid to acquire low band spectrum in the upcoming spectrum auction. The low band spectrum, with its high penetration, wide area coverage and fast speeds will strengthen the network coverage of carriers in the U.S. The FCC has partially restricted the participation of AT&T (NYSE:T) and Verizon (NYSE:VZ) in the upcoming auction, owing to the fact that they already have access to a large chunk of low band spectrum. The joint spectrum bid by TMUS and S is also believed to strengthen a possible merger case between the two companies.

Given that mobile data usage increased immensely in the recent past, the demand of low band spectrum, which has high area coverage and deep penetration, is on the rise. As for now, the two North American telecom sector giants, T and VZ, own a large percentage of the available low band spectrums, as shown in the table below.

Companies

Spectrum Availability

S

10%

VZ

34%

T

38%

TMUS

4.5%

Click to enlarge

Source: Bloomberg

As the 600MHZ low band spectrum auction is set to be held in mid-2015, all four big players are interested in acquiring spectrum. Owing to their current small spectrum holdings, S and TMUS are planning for a joint venture agreement to raise $10 billion for the upcoming auction. If S and TMUS enter the auction individually, the two wouldn't be able to buy significant spectrum with their relatively weaker pool of resources, as compared to T and VZ. As TMUS and S have less low band spectrum holdings, the joint bid will help the companies acquire more spectrum, which will not only improve their network coverage, but will also help them compete effectively.

As far as TMUS is concerned, the joint bid with S is very important for the company in terms of enhancing its low band spectrum footprint. In the recent past, TMUS has been criticized for lagging behind its peers in terms of network quality and coverage. TMUS recently made a $2.4 billion cash payment to acquire VZ's A-Block spectrum.

On the other hand, S, which currently tops all other carriers in terms of its spectrum holdings, has a different motive to support the joint venture. In fact, S wants to strengthen its case before the FCC for a merger with TMUS and wants the FCC to realize that the merger with TMUS could benefit customers through a wider area coverage and service enhancement.

While these two small players are teaming up for the spectrum auction, the big industry players, namely VZ and T, are not sitting idle. Although VZ has already rolled out its XLTE or AWSF network to 350 markets, to reinforce its network advantage, the company has shown a keen interest in buying a major chunk of low band spectrum in the upcoming auction.

On the other hand, T has the highest holdings of low band spectrum, and it still intends to bid in the upcoming auction; it has set aside $9 billion for the auction. As the company is actively rolling out its LTE footprint, it expects the auction to carve its path for the 2x10MHZ spectrum.

Conclusion
In efforts to keep the industry more competitive, the FCC has partially restricted the bidding power of VZ and T in the upcoming auction with its new regulations for the spectrum auction. The joint bid by TMUS and S will help the companies acquire meaningful spectrum holding, which otherwise would not have been possible due to their scarce resources. Also, TMUS and S will be able to enhance and expand their network coverage with the acquisition of low band spectrum. Moreover, the joint bid might also strengthen the TMUS and S merger case.

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.