The past couple of weeks have witnessed several industry events that could reshape what the wireless industry will look like going forward. Those events have been centered on the growing need for wireless carriers to get their hands on spectrum that consumers are devouring at an ever-increasing rate.
The biggest news continues to be AT&T’s attempt to acquire T-Mobile USA, which sent shock waves across the industry when announced earlier this year. Despite the audacity of the event, which would see the nation’s No. 2 operator acquire the No. 4 operator to form a new No. 1, many industry observers this summer had pegged the chances of that deal being completed largely intact at greater than 50/50.
However, following the filing of a Department of Justice lawsuit to stop that transaction and more recently the Federal Communications Commission’s uncensored comments on why the deal should not be approved, those handicappers have been slashing the odds.
While there are still those that think AT&T has not played its final card in this game, observers now seem to peg the chances of the deal going through relatively intact at 10% or less, with even a heavily revised deal full of concessions still at less than even money.
If the deal falls through, AT&T will be out spectrum assets it claims it needs to bolster its LTE network plans as well as currently held spectrum that was put up as part of a dowry in its attempt to purchase T-Mobile USA. The carrier looks to have braced for that possibility by recently saying it would take a $4 billion charge during the fourth quarter in connection with the $3 billion in cash and spectrum assets it might have to give up should the deal fall through.
Perhaps more significant for the wireless industry is Verizon’s attempt to acquire 1.7/2.1 GHz spectrum assets from a group of cable companies. That deal, which is currently valued at $3.6 billion, would see Verizon Wireless bolster its spectrum portfolio in support of its LTE plans as well as provide an exit strategy for cable companies that were looking to get out from under build out requirements for those spectrum assets. The deal also allows the cable companies to resell wireless services using Verizon Wireless network.
Unlike the ongoing drama surrounding AT&T’s attempt to acquire T-Mobile USA, industry observers seem optimistic about this transaction.
“Verizon-SpectrumCo, while a significant deal with meaningful industry implications in its own right, is unlikely to raise the kind of heightened antitrust and public policy concerns that prompted the Department of Justice and Federal Communications Commission to frown on the $39 billion merger of AT&T and T-Mobile/(Deutsche Telekom),” explained Jeffrey Silva, senior policy director of telecommunications, media and technology at Medley Global Advisors. “Favoring Verizon is, unlike AT&T/T-Mobile, the purchase of SpectrumCo’s cable wireless holdings does not implicate the removal of one of the four national wireless carriers from the market and thus is more likely to be limited to a market-by-market analysis. Government reviews of AT&T/T-Mobile involved market-by-market and national antitrust analyses, the latter proving highly detrimental to merger clearance. The optics of Verizon-SpectrumCo are not necessarily bad when put side-by-side with the more towering and complex AT&T/T-Mobile tie-up.”
Silva did note that while the deal could fly under the radar of a government agencies currently focused on the AT&T/T-Mobile USA deal, he did not expect it to slide by without some scrutiny.
“At the same time, given Verizon’s rich spectrum inventory relative to other carriers in the wireless space, we do not expect policymakers to necessarily rubber-stamp the proposed transfer of licenses as currently presented,” Silva added. “Criticism of Verizon-SpectrumCo from consumer/public interest groups and some policymakers would not be surprising, fresh on the heels of seeing their opposition to AT&T/T-Mobile bear fruit in official Washington.”
If approved, the deal would take off the table a vast swath of attractive spectrum assets as well as players that were looking to get into the mobile space on the cheap. Analysts expect the first part of this would be bad news for AT&T, especially if AT&T fails to pick up any spectrum assets from the T-Mobile USA deal, while the second could be bad for players like Sprint Nextel, T-Mobile USA and Clearwire as they would lose potential network investors.
That former is of course still up in the air as AT&T has yet to be denied in its attempt to pick up T-Mobile USA. However, if that deal collapses AT&T will be out a significant chunk of 1.7/2.1 GHz spectrum that was expected to bolster LTE network density. AT&T would still have a good chance of closing on its attempt to pick up 700 MHz spectrum from Qualcomm’s failed MediaFLO effort, and would likely become very aggressive in trying to pick up other spectrum assets where available.
That availability could include attempts to acquire smaller wireless players — MetroPCS or Leap — or to partner/acquire one of the handfuls of other spectrum holders that are currently contemplating moves into the wireless arena. Those players could include Dish Networks, which is looking to consolidate spectrum it picked up in the 700 MHz auction as well as its recent purchase of TerreStar Networks, as well as Cox Communications, which recently shuttered its wireless plans, but still owns 20 megahertz of 1.7/2.1 GHz spectrum and 12 megahertz of 700 MHz spectrum.
The other part of that agreement would seem to satiate a number of cable companies that have for years tiptoed around the mobile space. Previous attempts to resell services from Sprint Nextel as well as more recent agreements that would allow for mobile data services to be sold through Clearwire have been mired in lethargic attempts to market the services.
One analyst did note that cable companies being able to resell Verizon Wireless services could be a step too far for regulators.
“We believe that the FCC will only allow purchase of the spectrum if (Verizon) dissolves the cross-marketing agreement with cable MSOs, which is set to go into effect immediately,” noted Macquarie Equities Research. “It appears to us that cable MSOs reselling (Verizon) will be deemed to ‘not be in the public interest’ given (Verizon’s) market leading position. While the FCC cannot stop the marketing deal, it can put conditions on the spectrum sale that could ultimately cause the first deal to be unwound. We estimate 80% odds of long-term completion on the spectrum deal and 40% on the marketing agreement.”
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