This was a relatively quiet week for most of the 10 stocks covered, with $90 billion in capitalization added for the Fab Five and $12 billion lost for the Telco Top Five. Excluding the weekly gain for Apple (+$93 billion) and losses for AT&T (-$5 billion) and Verizon (-$7 billion), the remaining movements among their peers largely netted out.
The biggest concern this week centered around the price tab for the C-Band auction ($69.8 billion as of December 23rd). Two research houses (Raymond James and Credit Suisse) have estimated that the total auction take could be between $76-82 billion. With Verizon and AT&T expected to be the two largest bidders (and a cable consortium not far behind), there is growing concern over the debt burden placed on telecommunications providers by the auction (note: The nearly $70 billion in spectrum bids excludes $10-12 billion in relocation expenses winners will incur).
Compared to these elevated levels, the Sprint acquisition ($26.5 billion for equity plus the assumption of ~$37 billion in debt) is a bargain. Fortunately for T-Mobile, there is no “mark to market” principle for Sprint’s acquired spectrum (valued at slightly more than $41 billion prior to merger close).
One of the topics receiving little discussion is the choices that this auction forces – namely, what is deselected due to the higher price tag (we have referenced Sasha Javid’s wonderful website, but if you need it again, it’s here). Without a doubt, if AT&T is a winner and shells out $20-25 billion in auction payments and relocation expenses, there will be less for dividend increases and share buybacks even if, as reported by The Wall Street Journal and the New York Post, they receive $15 billion in new capital for a 49% stake in DirecTV. What does the capital requirement for C-Band mean for residential fiber deployments or film budgets or AT&T Mexico needs? Many questions remain for AT&T if they overpay (we do not think that they will, but if they do, it likely accelerates spinoffs and divestitures).
Should Dish come to the table with a large bid, it would be a logical phase to their deployment of 800 MHz/ LTE Band 26 from T-Mobile and AWS-3/ LTE Band 66, 600 MHz/ LTE Band 71 and CBRS/ LTE Band 48 PALs that they have accumulated to date (full map from Spectrum Omega here). But it would also imply that they have commercial distribution capabilities to quickly generate cash/ reduce leverage (which they don’t without an unnamed partner). A large spectrum purchase would need to be likely accompanied by an outside investment (Sunday Brief readers will remember or teaser on “Charlie’s SPAC” in our October 4 issue.
Verizon and the cable companies have the most balance sheet room for spectrum purchases, and it’s likely that there’s some competition between the two bidders for certain metro areas. Both Verizon and cable have excellent Finance folks on their teams, and it’s highly unlikely that either will have a “sky is the limit” approach to bidding when it resumes on January 4.
More market commentary will be available in the January 3, 2021 Sunday Brief. Please sign up through the website or send an email to firstname.lastname@example.org. Thanks – have a safe and happy week!