AT&T Continues To Secure Wireless Band For The Future

| About: AT&T Inc. (T)

AT&T (T) the telecommunication provider announced the acquisition of NextWave Wireless Inc (WAVE) on Thursday in a deal valuing the troubled company at $600 million.

The Deal

AT&T agrees to acquire NextWave Wireless in a deal valuing the assets of the troubled firm at $600 million. AT&T will pay $25 million for the equity of the firm including contingency payments of another $25 million. The remainder will be used to assume the outstanding debt of NextWave. Bondholders in the firm will receive cash and a transfer of some of NextWave's assets. The majority of Nextwave's bondholders already agreed to the terms of the deal.

By acquiring NextWave, AT&T will acquire the valuable licenses for Wireless Communication Services (WCS) and Advanced Wireless Services (AWS) bands. While the WCS spectrum has already been auctioned in 1997, it has not been utilized yet for internet usage as it might interfere with satellite radio users in adjacent spectrum bands. However in June, AT&T and satellite radio company Siriux XM (NASDAQ:SIRI) already filed a joint proposal with the Federal Communications Commission (FCC), which protects the satellite radio spectrum from interfering with the WCS spectrum. This proposal is still under review by the FCC and approval is key for AT&T's long term plans of creating new spectrum capacity. AT&T is apparently confident in the FCC's approval, given the latest move.

AT&T expects to close the deal by the end of 2012.

Boost Wireless Broadband Capacity

Besides the agreement to buy NextWave, AT&T also announced the acquisition of Horizon Wi-Com and the acquisition of spectrum from Comcast Corporation (CMCSA).

Even if the FCC would rule favorably, AT&T does not expect to deploy the spectrum within three years time. The acquisitions are part of a long term plan to boost wireless capacity. Carriers like AT&T are trying to cope with exploding demands for wireless capacity as smartphone and tablet usage is growing rapidly. If approved by the FCC, AT&T will deploy WCS spectrum for 4G LTE capacity in roughly three years time.

AT&T's latest strategy to buy pieces of spectrum is a result of the failed acquisition of T-Mobile USA last year, in a deal which would be as large as $39 billion. After the deal fell apart as a result of anti-trust concerns, the company is aggressively trying to buy more spectrum in smaller separate deals.

Boosting ARPU

Increasing broadband capacity is crucial for AT&T to drive future revenue growth. AT&T reported over 43 million smartphone subscribers at the end of its second quarter, driving service revenues up 4% to $14.8 billion. Postpaid ARPU (average revenues per user) increased 1.7% to $64.93 entirely driven by data ARPU coming in at $28.04 per month. Data revenues on smartphones increased from $5.4 billion to $6.4 billion in just one year and are set to overtake mobile phone revenues, perhaps as soon as next year.

Investment Thesis

Shares of AT&T have risen an astonishing 24% so far in 2012, towards the current levels around $38 per share. Shares have benefited from two notable trends this year.

First of all, many investors have been eager to invest in companies paying out high dividend yields, pushing up stock prices in those companies. Based on AT&T's current quarterly dividend of $0.44, the company pays an annual yield of 4.7% making it a very popular investment choice. Especially retirees which have known the company their whole life and have a need for "current" yield invest in AT&T.

Second, the company is showing that it can make money as the business is transforming again. Soon, data revenues will overtake mobile phone and text messages revenues, and again the company has found a way and subscriptions which allow it to boost revenues. Furthermore, many smartphone users are happy to foot their monthly increasing bills as they see the benefits of unlimited data on their smartphones.

Investors looking for a quick capital gain might search elsewhere, but for long term investors in search of yield, AT&T still offers a decent almost 5% yield per annum.

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