Verizon: Profit From New Spectrum Deal Now

Jul. 9.12 | About: Verizon Communications (VZ)

Spectrum acquisition is one of the primary investments made by wireless operators, accounting for the heart and soul of their operations. Wireless spectrum is a part of the electromagnetic spectrum corresponding to radio frequencies. These spectrums are licensed to operators by specific frequencies and geography.

To explain it easier, imagine the days when we drive around listening to our favorite radio station, anxiously waiting for our favorite music to play or paying attention to the commentator reporting the news around the country and the world. The radio station would have a name with number in it, for example 97.3 XYZ station. The number associated with the station is its radio frequency, it is the spectrum in which the radio station broadcasts its contents and is regulated by the Federal Communication Commission (FCC). To access the station, we have to tune our radio on the number line: 97.3 megahertz (MHz) to be exact.

The wireless spectrum that enables us to access radio stations is the same in principle as the spectrum mobile devices such as our smartphones use to make calls, use the internet or download our favorite apps. A specific portion in the electromagnetic frequency, which is assigned a number, covering an area is licensed by the government for specific use. The frequencies supporting mobile wireless communication in the U.S. occupy most of the spectrum between 1850 MHz and 2000 MHz's

Since the 1990s, mobile wireless spectrum licenses have been auctioned and distributed by the FCC to different wireless operators. The auction process is designed to bring profit to the government, raising billions of dollars in the past auctions.

Verizon Communications (NYSE:VZ) already has the largest number of spectrum licenses in the U.S. On June 25, 2012, Verizon Wireless and T-Mobile USA agreed to a spectrum swap. T-Mobile USA is the fourth largest wireless operator in the US and is a subsidiary of the German telecommunications incumbent Deutsche Telekom. The deal is a combination of a purchase and exchange of certain Advanced Wireless Spectrum (AWS) licenses in 218 cellular market areas across the U.S.

T-mobile said that this deal will improve its position in 15 of the top 25 cellular market areas in the country and improve its spectrum portfolio in 218 cellular market areas. The operator will gain spectrum licenses covering 60 million Americans, if the deal pushes through. While Verizon is said to gain spectrum licenses covering 22 million people for an undisclosed amount, some of the spectrum T-mobile is acquiring in this deal includes licenses that Verizon is purchasing from SpectrumCo, Cox TMI Wireless and Leap Wireless International (LEAP). SpectrumCo is a joint venture among cable operators, Comcast (NASDAQ:CMCSA), which owns 63.6 percent of SpectrumCo; Time Warner Cable (NYSE:TWC), which owns 31.2 percent; and Bright House Network, which owns the rest.

Verizon's acquisition of spectrum licenses form SpectrumCo and Cox wireless is still pending approval from the FCC. The $3.6 billion deal consists of two components, an acquisition of Verizon for a 20 MHz AWS from both companies and a marketing arrangement between the cable companies and Verizon.

The spectrum acquisition was first refuted by T-Mobile and MetroPCS Communications (PCS) when it was announced. They raised concerns that the deal might give Verizon unfair advantages and create a monopolistic environment. With the spectrum swap deal in place, T-Mobile changed its tone, saying that the deal between Verizon and the cable companies will create a healthier environment in the market. T-Mobile needs the spectrum swap to succeed in its scheduled LTE launch scheduled in the near future.

Verizon's interest in the swap will strengthen its 4th generation wireless technology, which is also known as LTE (Long-Term Evolution). Verizon's LTE network is currently being built on the 700 MHz range which T-Mobile is offering in the spectrum swap. The more important aspect of the deal is that it removes an obstacle in its acquisition of spectrum licenses with the cable companies, Cox Wireless and Leap Mobile. With T-Mobile on its side, Verizon has strengthened its position in the spectrum acquisition. The carrier is emphasizing the fact that it does not intend to gain a monopoly in the spectrum acquisition, but rather acquiring it to gain airwaves it needs to serve the consumer demand for data. To further gain a favorable decision from FCC, Verizon also intends to sell some of its spectrum licenses.

Both Verizon and T-Mobile said that the deal will give better wireless coverage and services to its consumers. The additional AWS spectrums that Verizon intends to gain will create more robust LTE network coverage in the eastern U.S. cellular market areas, which is used for voice and data usage by smartphone users. T-Mobile, on the other hand, needs the spectrum to build a 4G LTE network that can compete with the top three wireless carries, Verizon, AT&T (NYSE:T) and Sprint (NYSE:S). If approved, the deal would result in Verizon holding up to a maximum of 149 MHz of spectrum in one of the 184 cellular market areas' where it would be gaining new spectrum. T-Mobile would control a maximum of 90 MHz of spectrum in markets where it would be gaining new spectrum.

The FCC is expected to approve both deals by the end of the summer. Verizon is currently trading at $44, hitting its 52-week high last week on June 29. The stock has gained 17.5% in the last year. Verizon has a market capitalization of $126 billion and an enterprise value of $171 billion. The pending approval of the spectrum licenses will strengthen Verizon's position in the market and stock value. Since all the deals are interconnected with each other, I suggest buying Verizon now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.