Leap Wireless and Verizon Wireless Announce Spectrum Deals

Is a Spectrum License Land Grab in the Offing?

Last week Verizon Wireless and the cable consortium known as SpectrumCo announced a $3.6b deal for AWS licenses covering 259m POPs; that deal implied a more than 50% increase in the value of the subject licenses since the 2006 FCC auction. This week, Verizon is back at the table, acquiring $360m worth of PCS and AWS licenses from Leap Wireless and Leap affiliate Savary Island. In exchange, Verizon is selling 12 MHz of 700 MHz spectrum covering nearly 11m POPs in Chicago to Leap, for $204m.

Both deals indicate a healthy increase in spectrum values—which doesn’t come as a surprise given the growing popularity of mobile broadband services and the carriers’ race to deploy 4G LTE service. I also see AT&T’s March announcement that it would (attempt to) acquire T-Mobile as well as AT&T’s December 2010 deal for $1.2b in Qualcomm spectrum as catalysts that prompted Verizon to start shopping more seriously.

It’s potentially the beginning of a real land grab for spectrum licenses; those who 'have' will benefit from the major projected increase in mobile broadband use, and those who ‘have not’ could well be left behind. Those who 'have and sell' might earn a nice return today, but that leaves open the question of how to participate in the coming hockey stick growth pattern. The good news is that it seems much of the long dormant AWS spectrum is going to emerge from its cocoon, providing options for ILEC license holders.

In the $204m deal for Chicago, Leap is paying nearly 34% more than Verizon spent at auction in 2008, or $1.58/MHz POP. Verizon paid $152.5m for that license.

Leap said in its Public Interest Statement filed with the FCC that the additional 12 MHz “is needed to supplement the 10 MHz of spectrum on which Cricket currently operates in the Chicago area. The additional spectrum will enable Cricket to deploy LTE technology and thereby expand its service offerings, strengthen its presence, and improve the quality of services available to consumers in Chicago.” It continues, “With carriers worldwide upgrading to faster and more efficient LTE technology, Cricket’s deployment of this technology is critical to its ability to deliver competitive services to customers in the coming years. The associated sale of PCS and AWS spectrum to Verizon Wireless also enables Cricket to substantially finance the purchase of spectrum in Chicago. This transfer will thus enhance competition by enabling Cricket to provide more consumers with access to a wider array of high quality wireless communications services.” 

In the second transaction, Leap will sell nearly 340m MHz POPs comprised of both PCS and AWS spectrum licenses, for $188m, or $0.55/MHz POP, to Verizon. The licenses cover a total of 20.6m POPs and are scattered across the country.

Also in the Public Interest statement filed with the FCC, Verizon Wireless said that it “seeks to acquire spectrum to augment its existing capacity in order to respond to the projected increase in customers’ use of its network, particularly the rapidly growing customer demand for high speed wireless data services. Consumer demand for such services is exploding. Smartphone adoption continues to surge: 59 percent of mobile handsets sold in the United States in the third quarter of 2011 were smartphones, and currently 43 percent of all U.S. mobile phone subscribers own a smartphone. As consumers experience higher speeds through the use of smartphones, they tend to consume more data. Today, smartphones use 24 times more spectrum capacity than traditional phones. According to public estimates, the average smartphone will generate 1.3 GB of traffic per month in 2015 (a 16-fold increase over the 2010 average) and aggregate smartphone traffic in 2015 will be 47 times greater than it is today. Similarly, the rapid adoption of tablets places another substantial drain on spectrum. Tablets use approximately 120 times the capacity of traditional phones. In 2015, it is projected that mobile-connected tablets will generate as much traffic as the entire global mobile network in 2010."

Whoa Nellie! Smartphone traffic nearly 50x greater than it is today by 2015? And tablets will use as much traffic as the entire global network does today? Sounds to me like a serious demand for spectrum is brewing, which means values should continue to increase.

Finally, majority-owned (non-controlled) Leap Wireless affiliates Savary Island License A, LLC and Savary Island License B, LLC are selling an aggregate of 10 MHz of AWS spectrum covering 27.3m POPs to Verizon, for $172m or $0.63/MHz POP.

The receipts will be used to repay debt owed to Leap, which will in turn use the money to help pay for its Chicago 700 MHz buy and continue its LTE deployment. 

There's no doubt in my mind that we will continue to see the larger wireless carriers scoop up spectrum assets as the reality of the changing market sinks in. Verizon has been running its LTE network for a year now--clearly it's seeing a rapid increase in usage and as noted above, the tablet boom is only in its infancy. The question for you readers becomes how best to capitalize upon the opportunity. 


HickoryTech to Pay $28m for IdeaOne Telecom

Fargo-based CLEC Sells at 2.3x Revenue

HickoryTech (Nasdaq:HTCO) announced today that it has entered into an agreement to acquire IdeaOne Telecom Group, LLC, a Fargo-based CLEC and fiber network provider. The Minnesota-based ILEC will pay a reported $28m in cash for IdeaOne, in a deal that is expected to close by the end of 1Q12.

During its 3Q11 earnings call in November, HickoryTech continued to beat the business and broadband drum, and its purchase of IdeaOne supports the company’s strategy to expand services in both areas. Through the deal, HickoryTech will add 225 fiber route miles and 650 on-net buildings to its current fiber network in North Dakota, and will gain a customer base of 1,900 business and 1,700 residential customers.  

In addition to voice and Internet services, IdeaOne offers hosting, colocation, and data networking services to its business customers, utilizing a fiber network that includes multiple 10 GB fiber rings in and around Fargo. The acquisition deepens HickoryTech’s fiber footprint in the region and complements its ongoing $24m fiber build, that once completed will extend from Brainerd, Minnesota to Fargo.

On a conference call earlier today, John Finke, ceo of HickoryTech discussed the appeal of the North Dakota market, and shed some light on the capabilities that IdeaOne will provide. “There’s a lot of growth (in Fargo). The Fargo market has continued to expand due to the oil businesses. There is very low unemployment there, in the 3% range, and there are a lot of businesses which are expanding. When we built the route in 2010 to Fargo, really it was on a long haul basis to connect to the Fargo market place. We’ve been working with other providers in this market, like IdeaOne, to actually do the last mile termination to customers, so this will give the ability for us to own that last mile network all the way to the customer.”  

Financially, the acquisition will further shift HickoryTech’s revenue mix towards business and broadband services, which during 3Q11 accounted for over 70% of its top line. IdeaOne reported revenue of $11.1m in 2010, 85% of which was generated from business services, and it projects revenue of $12.3m in 2011. The deal will be accretive on a free cash flow basis for HickoryTech as IdeaOne expects its cash flow margins to be in the 40% range for 2011, while HickoryTech’s margins have been just shy of 27% over the past three quarters.

Despite the immediate margin improvement, the company does not expect significant future cost synergies from the deal, as it plans to invest more in Fargo in the coming years. Carol Wirsbinski, coo of HickoryTech, also indicated that integration costs are expected to be insignificant and will be spread over 4Q11 and 1Q12.

At a price tag of $28m, HickoryTech will pay around 2.5x IdeaOne’s 2010 revenue in the deal, but with IdeaOne’s top line projected to have grown 10%-11% YoY, the deal’s run rate multiple should be closer to 2.3x. From a cash flow perspective, the deal will be done at 5.8x projected 2011 OIBDA.


4G Wireless Front-Runner Verizon Scooping Up $3.6b in AWS Spectrum

Cable Sellers Get a 57% Premium Over Purchase Price, Plus Agent Arrangement

You have to admit, Verizon Wireless is run by some pretty slick operators. The company is far and away the leader in terms of 4G deployment (while pioneer Clearwire flounders, more on that below) after spending billions in the 2008 auction for 700 MHz licenses. And today, even as rival AT&T struggles to keep its ill-advised T-Mobile acquisition alive, Verizon announced that it will acquire 122 Advanced Wireless Services (AWS) spectrum licenses from the cable consortium that laggard Sprint used to date.  It just goes to show you that not all giants have the same vision, despite their lofty vantage point.

First, the deal details. SpectrumCo, LLC, a joint venture between Comcast, Time Warner Cable and Bright House Networks, will sell its 122 AWS licenses covering 259m POPs to Verizon Wireless for $3.6b. That’s a nearly 57% premium over the $2.3b that SpectrumCo paid for the licenses at the FCC’s auction in 2006, a fact which should cheer the many ILECs nationwide that have owned AWS licenses since the auction.

The FCC’s web site is still using 2000 Census data for POPs, but in the press release announcing the deal SpectrumCo said that there are 259m POPs included. Back when the auction was held in 2006, the FCC said that the subject licenses covered about 253.6m POPs, which implies a 2.1% increase since the auction. Based on 259m POPs, the Verizon Wireless deal implies a weighted average value per MHz POP of $0.706—or 53.5% more than the $0.435/MHz POP that the cable consortium paid in 2006.

Notably, the price per MHz POP isn’t too far below the final average price/MHz POP paid in 2008 for 700 MHz spectrum at auction, which came out at about $0.81/MHz POP. That said, the implication is that spectrum assets are still increasing in value, due to the more attractive propagation characteristics of lower spectrum bands. The AWS licenses lie at 1.7 and 2.1 GHz, which implies that more cell sites are necessary for build out—Verizon is presumably looking to bulk up its capacity in urban markets, which makes sense given the rapid uptake of its 4G service.

As a reference, I've taken the auction price and POPs for each of the 122 markets included in the sale and shown what the implied value/MHz POP is based on my estimated 53.5% premium over Auction 66 prices--some readers who own nearby AWS licenses may be interested in the "comparables," although admittedly there may be few buyers out there willing to pay the kind of premium that Verizon has ponied up.

Beyond the spectrum value implications, this deal highlights the shifting landscape in the wireless—nay, communications—world. AT&T is buying spectrum from Qualcomm in order to increase capacity, but that deal seems like a consolation prize now that the FCC has signaled that it is unlikely to support AT&T’s attempt to acquire T-Mobile (which was also a big AWS spectrum buyer in the 2006 auction).

I think Verizon’s tactics have been far more clever than AT&T’s, and the latter is now wasting vast resources on legal efforts to make the T-Mobile deal happen while Verizon races ahead in terms of 4G coverage nationwide.

And then there’s Sprint, which has tried off and on to work with the major cable players for more than a decade, but been unable to gain traction. Come to think of it, Sprint hasn’t played nice with partner Clearwire either, despite its commitment yesterday to provide up to $1.6b in funding for the floundering WiMax system operator. I would have expected more from Dan Hesse…

The transaction also reiterates what cableco Cox Communications indicated over the past few months when it first abandoned its effort to build and run its own wireless operations and then later shut down its reseller arrangement with Sprint. Running a wireless business isn’t necessarily an easy add-on for other communications providers (ILECs included). But it IS necessary in a competitive sense.

Ironically, Comcast, Time Warner and Brighthouse are now effectively getting in bed with the enemy. (Take it from someone who gleefully cancelled Comcast service just one month ago and is now happily streaming Netflix and Hulu video content over a Verizon 4G connection.) But it’s a smart alliance.

As stated in the press release, “The agreement comes at a time when consumer demand for wireless services and bandwidth is increasing rapidly...[this] is an important step toward ensuring that the needs and desires of consumers for additional mobile services will not be thwarted by the current spectrum shortage. While government action to free more spectrum is expected, this transaction ensures that the spectrum which is already available for mobile services is used effectively to serve customers.”

It’s interesting that the cable companies are the ones to say this now, considering that they were the target of accusations (not untrue) last spring that they were ‘warehousing’ spectrum, in particular, AWS spectrum. NAB head Gordon Smith railed against the cablecos at that time as he resisted efforts on the part of the government to make broadcasters relinquish additional spectrum.

And sure enough, five years after acquiring the licenses, the cablecos are not only making a handsome return on their original investment, but they’ve also leveraged the licenses into a deal with the most powerful wireless operator in the country. The SpectrumCo transaction includes agreements which will allow both the cablecos and Verizon to become agents for the other and the companies have also agreed to form “an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.” And that, my friends, is the wave of the future.


Carter Validus Mission Critical REIT Makes $95m Data Center Buy

Maryland-Based REIT Bought Richardson, Texas Facility Last July

Maryland-based Carter Validus Mission Critical REIT, Inc. (Carter Validus) filed on form 8-K with the SEC on November 25, 2011 that it has entered into an agreement to acquire 180 Peachtree, a 338k square foot data center with parking facilities in Atlanta, from Peachtree/Carnegie, LLC. The purchase price is $94.75m and the transaction is expected to close in January 2012. Carter Validus was formed in 2009 and is in the process of raising funding for additional data center acquisitions. It also spent $28.9m in July for a 20k square foot facility in Richardson, Texas.

Earlier this year the company filed a Form S-11 registration statement whereby it is offering for sale to the public on a “best efforts” basis a minimum of 200k and maximum of 150m shares of common stock at a price of $10/share. Another 25m shares are also offered pursuant to a distribution reinvestment plan (DRIP) under which shareholders may elect to have distributions reinvested into additional shares. In all, Carter Validus is seeking to raise upwards of $1.7b. Through September 30, the company had issued about 1.9m shares for gross proceeds of just under $19m.

180 Peachtree is currently 100% leased to six tenants, including Switch and Data, Level 3 Communications, and Atlanta's 911 center operations. The $94.75m price tag implies a moderate price per square foot of $280. By way of comparison, in priced deals this year to date, the average data center deal price per square foot is more than $1,600.

Last summer Carter Validus spent nearly $30m for a Richardson, Texas facility, or about $1,445 per square foot. Pro forma revenue reported in the company’s latest 10-Q indicate run-rate revenue of just under $3m annually, indicating a run-rate revenue multiple of nearly 10x. The Richardson facility is fully leased to an unnamed national health organization with annual revenue of $9b.

With the addition of these latest two deals, we’ve now tracked data center deals in 2011 involving 76 facilities worth more than $5.6b. For the deals where we had financial information, the weighted average multiple of revenue was 5.4x; the weighted average OIBDA multiple is 15.8x, reflecting the very high growth anticipated for the sector.


FCC Calls for Hearing on AT&T / T-Mobile Combo

This Deal is Doomed

Eight months after the surprise Sunday announcement that AT&T intended to acquire T-Mobile USA, and three months after the Department of Justice filed a lawsuit against the proposed deal, FCC Chairman Julius Genachowski revealed Tuesday that he opposes the combination. The Chairman circulated a draft Hearing Designation Order (HDO) amongst the other FCC Commissioners which effectively says that the FCC finds the proposed combination not to be in the public interest.

Assuming the HDO is approved by the other Commissioners, a hearing will be scheduled (not before the DOJ’s lawsuit) wherein an administrative judge will consider the facts. According to a note issued by the Rural Telecommunications Group (RTG) last night, the last time the FCC issued an HDO was when DirecTV and DISH Network were trying to merge; the DBS concerns walked away from that deal rather than fight the inevitable.

In my mind the failure of AT&T and T-Mobile’s efforts to merge has been inevitable all along, but especially following the August 31 filing of the DOJ’s lawsuit (never mind similar moves by Sprint and other opponents); the FCC’s action yesterday just confirms my long-held suspicions.  An AT&T spokesperson called the move “Disappointing…”  

Disappointing sure, but surprising?  No way, although clearly AT&T believed it could push the merger through when it announced the deal last March.  My initial response back then was:

“The announcement raises a plethora of issues that will certainly be discussed and debated for the next year or so as AT&T works to get approvals. First and surely foremost is the antitrust review; it remains highly speculative to assume this deal sails through. The FCC and other industry watchdogs have already noted that the wireless industry has devolved into a powerful duopoly and we’ve also been writing on the topic here in our blog. Expect heated debate and ultimately, should approval be granted, major concessions (read divestitures) on the part of AT&T. That said, AT&T has agreed to a particularly hefty breakup fee to DT/T-Mobile should the deal not go through, including a $3b cash payment as well as the transfer of unspecified spectrum licenses. I interpret this to mean that AT&T thinks it can get the deal done.” 

Despite AT&T’s vehement denials that thousands of American jobs would be lost and its promise to bring 5,000 overseas call center positions back home, there’s simply no way that the company could achieve the touted synergies without eliminating a massive number of T-Mobile jobs.  Back in June, my colleague David Selzer analyzed the composition of the $40b in long-term synergies that AT&T told investors it expected and concluded that a HUGE number—as many as 30,000—of jobs would be eliminated in the long run:

“The fact is that a merger like the one contemplated in this case will require a significant work force reduction to achieve AT&T’s publically predicted synergy value…Notice that the NPV of the non-headcount related synergies creates only about $19b in value, which is a hefty sum for sure, but is a far cry from $40b…Factoring in a workforce reduction of just under 85% of the T-Mobile employee base, based on my assumptions, provides about $900m in annual cash savings and another $7.8b in NPV. Combining these figures gets you annual savings in the $3b range and provides a total net present value of nearly $27b. This seems reasonable given that our calculations do not include the value of synergies generated in the first two years of operation after the deal closes, or any spectrum related synergies.”

Basically, Dave’s math concluded that it simply wouldn’t be possible to create that much in synergy value without firing the bulk of T-Mobile’s staff.

But the most obvious reason why I’ve been sure that this deal wouldn’t pass antitrust scrutiny is the fact that AT&T and Verizon Wireless already account for the vast majority of the wireless industry in the United States at this time, and are taking more and more subscribers from smaller competitors each quarter. In the third quarter of this year, AT&T added more net new subscribers than even Verizon Wireless; my analysis of the top wireless providers showed that AT&T and Verizon grabbed more than half of both gross and net adds in the period…and as we noted last summer, “Between 2006 and 2009 the combined share of net subscriber additions for AT&T and Verizon Wireless rose from 59% to 92%…and over the four years analyzed, the top-two carriers accounted for 71% of total net additions. Figures like these speak for themselves.”

The fat lady is about to sing. AT&T may decide to stubbornly fight in court or just walk away (after handing over substantial cash and spectrum to T-Mobile), but either way the deal is doomed. As a consolation prize, however, the FCC did indicate yesterday that it will support AT&T’s pending $1.9b buy of 700 MHz spectrum from Qualcomm.

As far as I’m concerned, Randall Stephenson and other AT&T execs need to seriously consider just walking away from T-Mobile as they consume tomorrow’s turkey. Take the $33b that’s left after paying T-Mobile’s breakup fee and deploy LTE as quickly as possible! How many markets does Verizon Wireless now serve with LTE (including this analyst’s home town)? Oh that’s right…179. And how many does AT&T serve now? 9. Time’s a wastin’.