Analysis: FCC’s C band auction impact on U.S. wireless telcos
by Grant’s Interest Rate Observer:
The Federal Communication Commission’s (FCC’s) ongoing sale of wireless C-band spectrum rights marks a decisive event for the telecommunications industry. As industry players compete for more digital bandwidth to help roll out 5G services, aggressive bidding looks set to generate a windfall for the U.S. government. Estimated proceeds will exceed $80 billion, easily topping the prior record of $45 billion for FCC spectrum in 2015.
As the three-way battle for 5G dominance takes shape, former also-ran T-Mobile U.S., Inc. appears to have the jump on competitors Verizon Communications, Inc. and AT&T, Inc., thanks in large part to substantial midrange spectrum frequency gained from last year’s acquisition of Sprint Corp. “For many years, Verizon hammered its competitors time and time again with the ‘best network’ and their big red coverage map,” Sasha Javid, chief operating officer of wireless company BitPath, told Bloomberg on Jan. 22. “Well, the map is looking quite magenta [signifying T-Mobile’s corporate color] today in terms of 5G coverage around the country.”
The incumbents will need to pay up to catch up. Analysts at New Street Research wrote on Jan. 11 that “if T-Mobile spends less than we expect, Verizon or AT&T will likely account for the shortfall. Neither company has the cash on hand to cover what we expect them to spend in the auction at present; we would expect more debt issuance for the group in coming weeks.”
Extra borrowings that accompany Verizon and AT&T’s 5G spending spree look to do no favors for the pair’s respective capital structures. Craig Moffett, co-founder and one-half eponym of MoffettNathanson, LLC, estimated last Tuesday that triple-B-plus-rated Verizon may spend up to $40 billion on 5G digital real estate, enough to add nearly one full turn of leverage to its 2.3 times reported net borrowings (3.2 times after accounting for operating leases and pension liabilities) as of Dec. 31. Analyst Craig Moffett wrote:
“Higher leverage will mean that capital spending will, by necessity, be pinched and stretched. Lower capital spending will mean that it will take longer to deploy their C-Band spectrum, which, in turn, will mean Verizon will be slower to catch up to T-Mobile.”
Meanwhile, Verizon’s other peer has already tapped the credit markets to finance its own shopping spree. This morning, triple-B-rated AT&T officially entered into a $14.7 billion, 364-day term loan offering at 100 basis points over Libor, with proceeds earmarked for general corporate purposes, including the financing of additional spectrum.
The new borrowings color AT&T’s dubious distinction as the world’s most encumbered non-financial company. Net debt footed to $198 billion, inclusive of operating lease and pension liabilities (equal to 3.6 times consensus 2021 adjusted Ebitda) as of Dec. 31, following efforts to diversify into higher growth businesses via the 2015 and 2018 purchases of DirecTV and TimeWarner for $67 billion and $109 billion, respectively. More debt could further complicate efforts to both tame its bloated balance sheet and improve slumping operating results including sharp subscriber losses and fast-retreating Ebitda within the DirecTV business.
Those problems have helped pressure shares to the tune of negative 18% after accounting for dividends since a bearish analysis in the Dec. 13, 2019 edition of Grant’s Interest Rate Observer, compared to a 24% total return from the S&P 500 over that period. By way of response, AT&T has pivoted to asset sales, including recently shopping DirecTV to private equity companies at a reported $15 billion price tag, while prioritizing its quarterly dividend, now at a 7.2% trailing annual rate. On last week’s conference call, CEO John Stankey reiterated plans “to use free cash flow after dividends for the next couple of years to pay down debt.”
Noting that the company is in danger of exceeding the 3.5 times adjusted leverage limit that Moody’s Investors Service has cited as a projected ceiling for AT&T to maintain its investment grade imprimatur, MoffettNathanson wrote last Wednesday that the spectrum sale left Ma Bell with two bad choices:
Sitting out the auction would have left them far behind in 5G; buying spectrum would leave their dividend looking even more unsustainable. Damned if you do, damned if you don’t.
Selling DirecTV now will help slow the overall rate of Ebitda decline, but it won’t solve the basic problem. AT&T’s leverage is far too high for a shrinking company, and their dividend is too high for them to do anything serious about lowering it. Something’s gotta give.
UPDATED: Mid-band Spectrum for 5G: FCC C-Band Auction at $80.9B Shattering Records
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Verizon wins bulk of C-band licenses:
Verizon spent $45.5 billion to secure about 3,500 licenses for wireless spectrum across the US in the recent C-band auction that elicited $81 billion in bids for boosting 5G networks with the mid-band frequencies, the Federal Communications Commission announced. AT&T won 1,621 licenses with its $23.4 billion in bids.
References: Light Reading (2/24), The Wall Street Journal (2/24), FierceWireless (2/24)
I’ve learn some good stuff here. Definitely will bookmark for
revisiting. You must put in a lot of effort to make the IEEE Techblog such a great, informative tech website.
Dec 23, 2021 Update from Bloomberg:
U.S. aviation regulators on Thursday expanded their warning about 5G service set to launch Jan. 5 on new frequencies, saying potential interference could have a broad impact on aircraft safety systems.
The Federal Aviation Administration issued a Safety Alert for Operators warning that “a wide range” of aircraft safety devices could malfunction and laid out the process it will follow in coming days to potentially issue specific restrictions on flights.
he FAA actions come as telecommunications and aviation companies agreed on Wednesday to share more data in an attempt to head off what has become a tense standoff over whether the 5G service could disrupt airlines and helicopter operations.
“The FAA is working with the aviation and wireless industries to find a solution that allows 5G C-band and aviation to safely coexist,” the agency said in a statement that accompanied the release of the alert and a Special Airworthiness Information Bulletin.
In the alert, the FAA identified 17 different safety systems and aircraft functions that could fail if 5G airwaves interfere with radar altimeters, which use radio waves to calculate an aircraft’s altitude.
As talks with the telecommunications industry are underway, the FAA is preparing what are known as Notices to Air Missions that may restrict flights in dozens of locations, it said.
The wireless industry and the Federal Communications Commission have said the new high-speed wireless service on the so-called C-band of spectrum don’t pose a threat, but the FAA and airlines are warning that there could be flight disruptions including delays and the diverting of planes to different airports. C-band airwaves are near the frequencies used by altimeters.
“We share the FAA and FCC’s confidence that we can and will have safe flights and robust and reliable 5G,” Nick Ludlum, a spokesman for the CTIA telecommunications trade group, said in an email. “We continue to work closely with the aviation industry and we look forward to joining the nearly 40 countries already operating 5G in the C-band on January 5th.”
A radar altimeter’s data is fed into numerous systems on aircraft, from basic help to pilots during landing to multiple safety devices, according to the FAA. Its data is used to prevent crashes into the ground and mid-air collisions, for example. But it also feeds aircraft automation that control throttle settings, takeoff guidance, windshear alerts and thrust reversers that help stop after landing.
“Anomalous (missing or erroneous) radio altimeter inputs could cause these other systems to operate in an unexpected way during any phase of flight – most critically during takeoff, approach, and landing phases,” the FAA said in the safety alert.
Another update: AT&T, Verizon Refuse FAA Request to Delay 5G Launch
AT&T and Verizon rebuffed a request from federal transportation officials to voluntarily delay the launch of new 5G wireless services, extending a showdown that could lead to potentially disruptive U.S. flight restrictions as soon as this week.
The cellphone carriers on Sunday offered a counterproposal that would further dim the power of their new 5G service for six months to match limits imposed by regulators in France, giving U.S. authorities more time to study more powerful signals’ effect on air traffic. The companies had planned to launch the service Wednesday in as many as 46 of the nation’s largest metropolitan areas.
“If U.S. airlines are permitted to operate flights every day in France, then the same operating conditions should allow them to do so in the United States,” the chief executives wrote in a letter reviewed by The Wall Street Journal.
The Federal Aviation Administration has been preparing to issue flight restrictions that could go into effect around the country as soon as Wednesday. The limits could restrict pilots from using certain automated systems to help land aircraft in bad weather, a move that could disrupt air travel and cargo shipments.
“U.S. aviation safety standards will guide our next actions,” the FAA said Sunday. The agency declined to comment about when it might issue the flight limits in official notices to air missions.
Telecom-industry officials have pointed to dozens of countries, including France, that have already allowed cellular service over parts or all of the frequencies in question, known as C-band. France is among the countries that have imposed wireless limits near airports while regulators study the effect the signals have on aircraft.
The letter by AT&T CEO John Stankey and Verizon CEO Hans Vestberg was in response to one sent by Transportation Secretary Pete Buttigieg and Federal Aviation Administration chief Steve Dickson late Friday. The New Year’s Eve missive asked the carriers to postpone their planned 5G launch by “no more than two weeks” while officials worked to address the wireless services’ effect on specific airports over the coming weeks.
Air-safety regulators have said the new cellular services could confuse key cockpit safety systems and have been preparing to impose potentially disruptive flight restrictions.
AT&T and Verizon, which combined serve more than half of all U.S. cellphone connections, disputed officials’ claims of air-safety risks. The companies postponed a planned December debut of the new signals to provide more time for telecom and aviation regulators to share information about the wireless infrastructure and aircraft equipment in question.
Wireless companies later pledged to limit C-band signals for another six months through early July. The letter Sunday proposed even stricter 5G limits over the same period.
But the telecom CEOs said transportation regulators’ latest delay request would be to “the detriment of millions of our consumer, business and government customers.” The CEOs added that carriers spent more than $80 billion to acquire the licenses in a Federal Communications Commission auction that closed in January 2021.
FCC authorities padded the spectrum they auctioned with a swath of buffer frequencies to prevent interference with cockpit systems. But air-safety regulators have expressed concern that more sensitive altimeters could mistake cellular transmissions for terrain.
AT&T and Verizon have spent the past year preparing to turn on new signals to provide new fifth-generation wireless technology, a faster and more capable mobile service. Wireless companies in other countries already use similar frequencies, but the spectrum wasn’t available to U.S. providers until recently.
Without a resolution to the dispute, Messrs. Buttigieg and Dickson warned the FAA’s flight limits would bring severe economic consequences.
“Failure to reach a solution by Jan. 5 will force the U.S. aviation sector to take steps to protect the safety of the traveling public, particularly during periods of low visibility or inclement weather,” they wrote in their Dec. 31 letter.
Airlines have been bracing for significant flight cancellations and diversions due to potential FAA flight restrictions because of the regulator’s aviation-safety concerns. Pilots and airlines had been awaiting details of potential FAA flight restrictions that limit the use of systems that rely on radar altimeters.
Over the past week, U.S. air travel has been snarled by a mix of winter storms and staffing challenges because of increasing ranks of airline crews calling in sick with Covid-19 as the U.S. deals with a surge by the Omicron variant. Thousands of flights have been canceled and delayed.
The competing proposals are the latest in a flurry of behind-the-scenes work by aerospace manufacturers and wireless companies, their regulators and senior White House officials. As they attempted to hammer out solutions to allow the new 5G service to go live without prompting severe flight restrictions, the trade group Airlines for America asked the FCC to consider an emergency request to delay the wireless rollout.
The airline trade group said Sunday it continued to urge the FCC and telecom industry to work with the FAA and aviation industry to reach a compromise.
The FCC is an independent agency that acts outside the Biden administration’s direct authority. The commission hasn’t shown an interest in limiting licenses that it found safe to grant in a 2020 order authorizing the 5G auction.
An FCC spokeswoman declined to comment on the airline group’s request but said the commission remained optimistic that “by working together we can both advance the wireless economy and ensure aviation safety.”
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