AT&T Inc.'s just-announced acquisition of Leap Wireless International Inc. is a tacit acknowledgment by the company that it does not intend to wait for the Federal Communications Commission to make more spectrum available through an auction.
The deal for Leap would give AT&T five million more subscribers and 23 megahertz of spectrum nationwide, at a time when AT&T is trying to keep pace with Verizon Wireless in the deployment of the next-generation mobile broadband services--known as 4G LTE. To date, AT&T has launched 4G LTE in over 290 markets; Verizon now has it in about 500 markets.
“It gives AT&T a bit of a breather on spectrum,” Roger Entner, an analyst and founder of Recon Analytics, who follows the wireless industry, told BNA in an interview July 15. “Of all the wireless carriers out there, AT&T is the most spectrum-constrained in the largest metropolitan markets, and this puts them roughly on equal footing with Verizon in terms of spectrum.”
From a regulatory perspective, the Leap deal functions as a hedge against the uncertainties surrounding the FCC's planned incentive auctions, under which TV broadcasters will voluntarily give up their spectrum to the commission in exchange for a portion of the proceeds of an auction to the wireless carriers. The auctions could yield between 60 MHz and 120 MHz of valuable spectrum, but probably will not take place for two years at least. And beyond questions about timing, controversy is increasingly swirling around whether the FCC will restrict how much spectrum the biggest wireless carriers--among them AT&T--can bid on in, and in which markets.
“No one knows how the auctions will play out at the FCC,” Entner noted. “AT&T is saying, basically: 'We better get spectrum somewhere else now.'”
On a macro level, the merger deal is the latest example of consolidation in the U.S. wireless industry, as companies seek to stockpile spectrum assets to meet the surging demand from smartphone users and gain competitive advantage.
For AT&T, the move follows the company's failed attempt in 2011 to buy T-Mobile USA Inc. for $39 billion, a deal that would have combined the second- and fourth-largest wireless carriers in the country and effectively eliminated what has been termed the “Big Four” (Verizon Wireless, AT&T, Sprint Nextel Corp., and T-Mobile). Spectrum was AT&T's motivator then, as with now.
And since that merger fell through, Verizon (still No. 1 in the country in number of subscribers), Sprint Nextel Corp. (No. 3), and T-Mobile (No. 4) have only solidified their strength as formidable competitors to AT&T.
In 2012, Verizon scored a deal with a group of cable companies that agreed to sell it spectrum licenses to build its mobile broadband network in exchange for allowing them to sell their cable TV services inside Verizon stores.
In July of this year, Softbank Corp. acquired a controlling stake in Sprint. The Japan-based company is giving Sprint a $5 billion cash infusion to help it expand its 4G LTE (fourth-generation, long-term evolution) mobile broadband network and potentially cut more deals. Also this month, Sprint completed a buyout of wireless network operator Clearwire Corp. (the No. 5 carrier), which holds more than 9,000 2.5 gigahertz spectrum licenses and leases covering 411 of the 493 basic trading areas, or BTAs, in the country, an average of 120 MHz to 150 MHz across its geographic footprint--by far the largest single spectrum holder among wireless carriers, even including Verizon and AT&T.
In May, Deutsche Telekom AG, T-Mobile's parent company, scooped up MetroPCS Communications Inc. (the No. 6 carrier) to combine it with T-Mobile; a month later, T-Mobile entered into a $308 million deal to buy spectrum from U.S. Cellular Corp. (No. 7).
Such mergers and acquisitions will likely only continue, especially among smaller regional players with valuable spectrum assets.
“It is clear that the Big Four carriers are not optimistic around the timing of new spectrum coming from the government or the broadcast auctions,” said Jennifer Fritzsche, a senior analyst with Wells Fargo Securities, in a research note July 15. “As a result, we believe there could be more consolidation in the secondary market.”
Fritzsche mentioned U.S. Cellular and NTELOs (the No. 11 carrier) as possibilities. Recon Analytics' Entner suggested that C Spire may also be seeking a merger partner.
Without access to spectrum in particular, many of these smaller regional wireless carriers cannot compete effectively in today's device-driven market.
“The national wireless carriers against which we compete generally have greater spectrum capacity than we do in the markets in which we would launch LTE,” Leap explained in a Form 10-Q filed with the Securities and Exchange Commission in March. “Because the efficiency of an LTE network and the peak speeds that it can deliver depend upon the amount of contiguous spectrum that is available, competitors who have access to more spectrum than we do are likely to offer faster speeds for their next-generation services and operate those networks more efficiently than we could. As a result, we may be required to take various actions to meet consumer demand, including acquiring additional spectrum, entering into third-party wholesale or roaming arrangements, leasing additional cell sites, spending additional capital to deploy equipment or other actions. We cannot assure you that we would be able to take any of these actions at reasonable costs, on a timely basis or at all.”
Continuing, the company warned: “If we are unable to acquire or obtain access to additional spectrum in the future to meet customer demands, such inability may materially and adversely affect our competitive position and our business, financial condition and results of operations.”
For Leap, entering into a deal with AT&T may not just be a smart decision, but a necessary one to stay in business.
The company currently holds PCS (Personal Communications Services) and AWS (Advanced Wireless Services) spectrum licenses covering 137 million people. Notably, AT&T and Verizon have centered their 4G LTE networks build-outs around AWS spectrum.
“This is another example of the escalating value of spectrum as data pricing gets more competitive and data devices like tablets become more ubiquitous,” said Kevin Smithen, an analyst with Macquarie Securities USA Inc., in a research note July 15.
In making the announcement late last week, the companies said the owners of nearly 30 percent of Leap's outstanding shares have entered into an agreement to vote in favor of the deal. On top of shareholder approval, AT&T and Leap also need the FCC and the Department of Justice to sign off, which many analysts expect.
“We're skeptical the DOJ would seek to block the deal outright,” Christopher King, an analyst at Stifel Nicolaus Telecom Equity Research, said in a research note July 15. “The DOJ has made clear its objections to AT&T taking over T-Mobile, but it has not voiced similar objections to Bell takeovers of smaller carriers. In fact, the DOJ recently signaled it's particularly concerned about preserving competition among the four largest national carriers. We don't think the DOJ focus on the Big 4 is happenstance, and our sense is that while the AT&T-Leap transaction will spark some antitrust concerns, they likely will not rise to the level of deal breakers.”
The FCC, meanwhile, is finalizing new rules to govern how much spectrum a single carrier can hold, which King said could complicate the agency's review of the AT&T-Leap deal.
Under the FCC's so-called spectrum “screen,” if one company ends up with more than one-third of the available spectrum for mobile services in any geographic market, the agency could decide to take action, such as rejecting a merger or acquisition or requiring divestitures of assets.
“We wouldn't be surprised if there are some [markets] where the combo would exceed the screen, forcing closer looks,” King wrote. “We also can't rule out the possibility the FCC could add further merger conditions.”
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