As wireless carriers began bidding on 422 personal communications services licenses up for grabs in the government auction last week, investors were hoping carriers were not feeling extra generous due to the holiday season.
Previous spectrum auctions have seen prices escalate rapidly-along with investor fears that carriers will never be able to recoup the costs associated with purchasing the licenses and building out the network to supply services.
But this auction is seen by analysts as a little different from the usual free-for-all spectrum grab. Recent spectrum-swapping deals by carriers to shore up holes in their networks have left many in good positions entering the auction.
“The licenses up for bid cover about 60 percent of the country, but are mostly seen as `fill-in’ for the major wireless carriers,” said Peter Friedland, wireless analyst at W.R. Hambrecht & Co. “For someone like VoiceStream [Wireless Corp.] or Sprint PCS, or even AT&T [Wireless Services Inc.] and Cingular [Wireless], they are looking to fill in holes of their current coverage areas. There will not be a lot of infrastructure needed to support the new spectrum since most of the necessary infrastructure is already in place.”
Friedland said that unless a large company looking for a broad national footprint, like Nextel Communications Inc., starts going after a lot of licenses aggressively, the final price tags for licenses should remain reasonable.
A reasonable auction should help wireless carriers’ stock prices, which have recently been trading closer to 52-week lows than highs.
“This is almost the worst time to have an auction,” said Larry Swasey, a wireless analyst at Allied Business Intelligence Inc. “Investors are going to look at the carriers, who are already struggling to make money, spending billions of dollars on spectrum suspiciously. A lot of wireless carriers will be afraid to throw too much money too quickly into the auction because they know investors are worried about the bottom line.”
AT&T Wireless, which has seen its stock suffer along with parent AT&T Corp. in recent months, was very aggressive in early bidding. AT&T was especially eager for spectrum in the New York and Los Angeles markets, where it has suffered from capacity constraints for some time. AT&T Wireless was bidding in the auction through its own means, its parent company, AT&T Corp., and through an agreement with designated entity Alaska Native Wireless, a collection of smaller Alaskan wireless operators. This arrangement allowed AT&T to bid indirectly for spectrum set aside for smaller wireless carriers.
Investors looked upon AT&T’s aggressive habits favorably. Its stock was up slightly during the first rounds of bidding in light of its multimillion-dollar bids. The rebound also comes at a time when rumors have surfaced that AT&T’s depressed stock price has left it open to a possible takeover from a competing wireless carrier.
VoiceStream Wireless, which received a $5 billion investment from Deutsche Telekom prior to the auction-saw its stock price fluctuate after it began bidding aggressively early in the auction. Analysts said VoiceStream, which also was bidding on licenses through an agreement with Cook Inlet, would have to be very aggressive if it wanted to build out a national network.
Cingular Wireless also partnered with a designated entity, Salmon PCS L.L.C., to participate in the auction. These arrangements angered some smaller DEs, which filed protests with the FCC claiming the agreements circumvent the commission’s plans allowing smaller companies equal access to spectrum.
Sprint PCS saw its stock rise slightly during early bidding as the company kept a low profile. Sprint PCS is not expected to be a big player in this auction.
“We think auction phobia has for the most part been discounted in the stocks and we like [AT&T Wireless], [Sprint PCS] and the regional carriers who are all well-positioned for the auction,” Lehman Brothers said in a release before the auction began.
The wild card in the auction, Nextel Communications, kept a low profile during the first week of bidding and saw its stock price rise slightly. Nextel’s low profile was a bit of a surprise to many analysts, who expected Nextel to bid aggressively.
“We believe Nextel’s apparent decision to lay low in the current auction represents a prudent financial decision,” Friedland told clients last Thursday.
Some analysts attributed the rather stable reactions in carriers’ stock prices less to the auctions and more toward a possible interest rate cut by the Federal Reserve in January.
“I do not think it’s directly related to the auctions,” Tim O’Neil of Wit SoundView told Reuters. “I think it’s market sentiment turning positive. This space has been the worst-performing space in 2000, and I believe it was severely oversold.”
Swasey said most investors looking at short-term returns may be spooked at the money carriers will be throwing at the auction, but in the long run, acquiring additional spectrum is just a cost of doing business.
“Once you have spectrum, it is like owning a house,” Swasey said. “It just becomes more valuable with time. Investors will look back on this auction in the future and see that carriers really did not spend that much money relative to what they got.”
Swasey also pointed out that “smart” investors would see a strong future in wireless data services that the additional spectrum up for grabs will allow.
“If they are forward thinking, they will see the auction as a positive for the carriers,” Swasey noted. “Wireless data can’t take off in a year, but people would be foolish to discount its potential so quickly.”
Swasey noted one saving grace for carriers that may keep the prices of spectrum down is that many are looking beyond this auction toward the FCC’s third-generation spectrum auction tentatively scheduled for June 2002. Next-generation licenses have generated close to a $100 billion in recent European auctions.
“I think the final prices paid for spectrum during this auction will be in the lower end of estimates,” Swasey said. “Carriers are definitely looking toward the future 3G auctions.”
