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.