C band auction
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.
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References:
UPDATED: Mid-band Spectrum for 5G: FCC C-Band Auction at $80.9B Shattering Records
Importance of FCC C Band Auction for 5G in the U.S.
FCC Chairman Ajit Pai has described the commission’s plan for its auction of a portion of the C-band — the 4Ghz to 8GHz radio frequencies used mostly for consumer satellite transmissions, but in the future for 5G mobile broadband.
The FCC wants to auction off the bottom 280MHz (the 3.7 – 4.2Ghz range) of the C-band and reserve 20Mhz of the band above that threshold for further needs. Both the FCC and current satellite operators say this will still leave enough spectrum for the operators to provide the same level of service that we have today.
The C-band is a valuable block of very underutilized spectrum. Portions of it are also a great addition to mobile operators who want to roll out 5G using the mid-band spectrum.
The 3.7 to 4.2Ghz range of the C band would offer a great balance of range and capacity which is important when carriers want to offer any real nationwide 5G service. A combination of low-band, mid-band, and upper millimeter-wave bands would offer carriers plenty of spectrum to maintain existing networks and add 5G expansion from coast to coast, and that’s what carriers and the current FCC wants to see happen.
Executives from Verizon, AT&T and T-Mobile stated their support for Federal Communications Commission (FCC) Chairman Ajit Pai’s proposal to get C-band spectrum cleared and available for a public auction, a plan that immediately saw backlash from some senators and public interest groups.
The network operators’ support isn’t surprising given they’ve been pressing for more mid-band spectrum for 5G and lobbying for quick action on C-band spectrum specifically, but they’re all coming at it from different places.
Currently, four satellite operators provide the majority of C-band satellite service in the U.S. — Intelsat, SES, Eutelsat, and Telesat. These are the companies that provide the actual satellite broadcast that you might be paying another company for and reach well over 100 million homes.
The satellites and ground equipment need to be changed so that they use the upper 200MHz of the C-band to transmit at the same level of service we’re all used to. The cost of this relocation is expected to be in the $3 billion to $5 billion range and will be covered by the auction winners.
The FCC would like this relocation, which is expected to be finished by September 2025, to be expedited. It proposes what chairman Pai calls “accelerated relocation payments.” These would also be paid by the winning bidders, but only if the satellite operators meet a specific schedule: free the lowest 100MHz of the spectrum by September 2021 and the remaining 180MHz by September 2023. Should this occur, the fees would include these expedition bonuses and rise to $9.7 billion.
Chairman Pai says that this is almost necessary if the U.S. wants to be competitive with the rest of the world when it comes to 5G:
“It is in the public interest to make available frequency in the C-band as quickly as possible as part of a national priority to promote American leadership in 5G. To get the job done quickly, we need to align the private interest of satellite companies with the public interest.”
Pai also notes that these are simply FCC proposals and that Congress can overrule any or all of them.
While acknowledging that Congress can have the final say, Pai also stated the regulations that allow the FCC to make these decisions.
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Section 316 of the Federal Communications Act grants authority to modify any licenses granted to current holders of C-band spectrum, section 309 allows the FCC to auction the lower 280MHz of the spectrum for “flexible” use, section 303 allows the FCC to set new rules and regulations for the technical usage of the C-band, and Title 3 allows the FCC to require the auction winners to pay any and all relocations fees.
Pai also suggested that he hopes Congress will make a small override to the proposed FCC recommendations and offer 10% of the proceeds to rural broadband initiatives. This is a promise Pai has made and championed for since placed as FCC chair, yet so far we’ve seen no movement from carriers or to regulations.
If there is to be any real nationwide 5G network that’s reliable and stand-alone, we’ll have to see plenty of spectrum reallocation. Some, like this news, will be authorization for new use cases and others will be carriers repurposing existing holdings. It will take a lot of work before any country has a full 5G nationwide network.
References:
https://www.multichannel.com/news/c-band-auction-timetable-plan-faces-challenges
