AT&T's (NYSE:T) acquisition of DirecTV (NASDAQ:DTV) was bit of a head scratcher due to Dish Network (NASDAQ:DISH) being considered a much more attractive target due to its enormous spectrum. A recent report suggests that Verizon Communications Inc. (NYSE:VZ) agrees with this notion, which could cause several effects for shareholders.
Where's the spectrum?
AT&T's near $50 billion acquisition of DirecTV significantly boosts its presence in the television space. DirecTV has 20 million U.S. and 18 million Latin American subscribers, which will add to U-verse's 10.7 million users and give AT&T a great deal of leverage in this space.
Apparently, AT&T is trying to build on a U-verse segment that's growing at 25% annually and now accounts for 10% of the company's total revenue. However, analysts have been quick to notice that DirecTV lacks any spectrum assets, which is a key component in dictating just about all merger and acquisition moves of large telecom companies.
What is spectrum?
Spectrum is important because it allows for the free flow of data, and with newer smartphones needing more data and consumers using these devices more often, such flow is important. Essentially, data can be compared to vehicles and spectrum an interstate. When too many vehicles crowd an interstate, the flow of traffic begins to slow. However, if that interstate is widened or alternative routes are created, those vehicles can flow at a faster pace.
This example is a good illustration of why spectrum is important for telecom companies, explaining why most large acquisitions involve large spectrum assets. For AT&T to spend near $50 billion and not gain new spectrum, it has created a lot of questions.
Will Verizon get even stronger?
With that said, Verizon is clearly AT&T's largest competitor, and just recently spent more than $100 billion to take full ownership of its wireless business. Verizon now has more leverage in the wireless business, which could explain why AT&T felt the need to purchase DirecTV as a hedge. News has since surfaced from the New York Post that Verizon is very interested in acquiring Dish Network's spectrum.
Reportedly, early talks have already begun for Verizon to purchase the assets in what could be a great deal for both companies. Dish owns a spectrum valued at more than $20 billion that it worked aimlessly to get approved by the FCC for mobile use.
Is this good for Dish?
Spectrum is separated by high and low frequency, with the former being great in urban areas with a higher density of usage. Seeing as how the majority of data is used in more densely populated areas, this would be a big win for Verizon. Also, since Dish Network failed to acquire or partner with any of the national telecom companies, it would allow it to create value on an asset that is currently unused in the mobile space.
Moreover, Dish has been very aggressive in a low interest rate environment, and has total debt of more than $13.5 billion with $4.6 billion being current liabilities. This has allowed the company to strike significant content deals, grow throughout the U.S., improve its technology, and become more competitive against DirecTV.
However, with AT&T now owning DirecTV, Dish doesn't have the leverage on its balance sheet to make those same investments twice. As a result, a $20 billion spectrum would pay off all debt and add to its near $9 billion cash position. Not to mention, Dish could focus solely on growing in its core business, all of which is good for shareholders.
As for Verizon, the full stake of its wireless business, combined with highly valuable spectrum, could be too much for AT&T to handle. Verizon's 4G LTE network is already the nation's largest, covering 97% of Americans, and would allow it to improve the speed in markets that are most valuable and crowded. All in all, Verizon acquiring Dish's spectrum looks like a win for both companies, and perhaps a loss for AT&T's wireless business.
Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.