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Why T-Mobile Bought Verizon's Spectrum

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T-Mobile (NYSE: TMUS  ) just made a deal this week with Verizon Communications (NYSE: VZ  ) to purchase additional spectrum to boost its wireless reach. The deal will cost T-Mobile about $2.36 billion in cash and $950 million worth of its own spectrum, but will provide two important things for the company: an enhanced network and an even better value for potential buyers. 

T-Mobile is paying for the additional spectrum with capital it raised from both a second public offering and sales of senior notes back in November. The two initiatives helped T-Mobile raise about $4 billion total. Verizon not only gets cash for a spectrum that it may have overpaid for, but it also gets $950 million worth of spectrum from T-Mobile that it needs for its own network coverage.

The infamous uncarrier is purchasing spectrum from the 700 MHz A-Block, which the company says will improve its coverage in 9 of the top 10 cities and 21 of the top 30 U.S. markets. The low-frequency spectrum is good for improving signal strength in buildings and increases its coverage in rural areas.

The deal is expected to close in the middle of this year, and will be an important step not just in shoring up T-Mobile's network, but also as a strategic move in making the company more valuable for a possible merger or acquisition.

Just two weeks ago The Verge reported that SoftBank, which owns 80% of Sprint, was in the final stages of talks with T-Mobile on a possible $19 billion buyout. The only problem with such a deal is that there's a lot of potential for the Federal Trade Commission to strike it down. When AT&T made a bid for T-Mobile back in 2011, the deal wasn't approved because FTC said U.S. consumers were better off with four major carriers, not three. A deal with SoftBank would bring Sprint and T-Mobile under one roof, and could face the same fate as the AT&T deal.

That doesn't mean T-Mobile's latest wireless spectrum purchase was all for nothing though. Obviously its customers will benefit if the deal goes through, and there's also another company potentially waiting to purchase T-Mobile -- DISH Network (NASDAQ: DISH  ) . The satellite service provider unsuccessfully tried to purchase Sprint last year, and has been public about its interest in T-Mobile.

Investors should be pleased with T-Mobile's network expansion in 2013 and with the improvements offered by the new Verizon deal. Though it's likely the deal will go through, keep in mind that nothing will be finalized for several months. In the meantime, investors should be watching for any more potential buyout news. With T-Mobile's CEO John Legere crashing AT&T's party at the Consumer Electronics show earlier this week, the new spectrum deal just announced, and a possible purchase of the company, 2014 is likely to be a very interesting year for T-Mobile investors.

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Chris Neiger

Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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