Investors unloaded shares of T-Mobile US (TMUS) this morning after the carrier announced a $1 billion convertible preferred stock offering late yesterday. The company’s shares were off more than 5% in late morning trading.
“Spectrum security comes at a steep price,” said analyst Kevin Smithen of Macquarie Securities, adding that he views the offering as “unnecessary dilution at the wrong price.” A convertible preferred stock offering is often dilutive to current shareholders because it can convert to common equity in the future, increasing the number of shares outstanding and thus decreasing the value of each individual share.
The FCC’s current spectrum auction has seen higher bid prices than most observers expected, and that may be one reason T-Mobile US is trying to secure new financing. Before the auction started, the company announced plans to issue senior notes due in 2023 and in 2025, saying that it might use the proceeds of that offering to buy spectrum. Analyst Jennifer Fritzsche of Wells Fargo thinks T-Mobile US may be looking beyond the current auction.
“We continue to believe TMUS will be aggressive in purchasing the A block spectrum it does not own,” she wrote in a research note. “Recall, US Cellular (USM) is one of the largest holders of this A block spectrum.” In addition, T-Mobile US could be planning ahead for the FCC’s auction of some of the 600 MHz spectrum currently used for broadcast television. That auction is expected to happen in 2016.
“Securing nationwide low-band spectrum either in the private markets or in mid-16 in the incentive auction is important, we don’t dispute that. However, given attractive bond yields, we would have preferred to see the company ramp up EBITDA over the next few quarters and issue more debt,” said Smithen. He believes that the carrier’s momentum in the marketplace could lead to stronger earnings and a lower cost of capital down the road.
“We expect T-Mobile’s cost of capital to drop in coming quarters,” he said. “However, more 700MHz spectrum appears to be available today and T-Mobile’s board has chosen current flexibility over future balance sheet leverage.”
