T-Mobile (TMUS 0.02%) spent nearly $10 billion on relatively few spectrum licenses in the FCC's C-band spectrum auction that concluded last month. Still, it seems to have accomplished two goals at the auction: It acquired the most strategic licenses for its portfolio and it forced rivals Verizon Communications (VZ -4.67%) and AT&T (T -1.21%) to spend more than anyone anticipated. Verizon pledged $45.5 billion for the mid-band spectrum licenses and AT&T agreed to $23.4 billion in spectrum licensing.
Planning for better coverage in cities
Without getting too deep into the technicalities, T-Mobile's spectrum holdings in the mid-2010s were well-positioned for major metro areas but not as great in rural areas. After merging with Sprint, T-Mobile has the opposite problem: Lots of usable spectrum for its 5G network in rural markets, but big holes in the portfolio in major metro areas with dense populations.
T-Mobile CEO Mike Sievert. Image source: T-Mobile.
T-Mobile's $9.3 billion in winning bids gave it just 142 licenses. That's a whopping $66 million per license. By comparison, Verizon spent just $13 million per license and AT&T spent $14 million per license.
T-Mobile bought licenses covering some of the biggest populations, the areas where it needed to improve its position the most. And it did so while spending less than analysts expected after bidding climbed to $81 billion (though nobody expected total bidding to reach $81 billion). After bidding closed, analysts estimated T-Mobile spent between $10 billion and $15 billion.
T-Mobile did have to raise some additional debt in order to fund its spectrum bids. It agreed to sell $3 billion in bonds in mid-January. It originally planned to raise just $2 billion in debt.
The competition is getting stretched thin
While T-Mobile spent less than anticipated acquiring new spectrum licenses, Verizon and AT&T spent more. Verizon's $45.5 billion pledge to the FCC accounts for more than half of the total bids, and it's well above analysts' expectations. AT&T's $23.4 billion in bids is less offensive, but still above estimates.
The truth is the two wireless competitors were forced to spend big on lots of spectrum licenses in order to catch up to T-Mobile's strong position. T-Mobile has successfully built out a 5G network on its 2.5 GHz spectrum, covering over 100 million people. That proves the viability of 5G on mid-band spectrum and creates a big gap in coverage between T-Mobile and the competitors.
But spending so much on spectrum will hurt both companies' already stretched balance sheets. AT&T is committed to debt reduction after its acquisitions of DirecTV and Time Warner left it burdened with over $150 billion in debt. It tapped Bank of America for a $14.7 billion loan it can exercise until the end of May, which must be repaid within a year. AT&T could refinance that loan into long-term debt if necessary, but it's looking to sell a stake in its pay-TV business to cover that amount.
Verizon, meanwhile, is also steadily improving its debt position, but the $45 billion spectrum expense is going to set it back. It entered a $25 billion loan agreement with JPMorgan Chase and Morgan Stanley with similar terms as the AT&T loan. Moody's is considering changing the telecom company's positive credit rating outlook to stable following the new debt announcement.
Importantly, it will take time and additional capital for AT&T and Verizon to monetize the spectrum assets they committed to buying. It will take nearly a year before they can clear some of the spectrum and start deploying it, and most will take three years. Clearing and deployment cost money. It'll take even longer before it can really light up the network and monetize the spectrum licenses. That means the two companies may be looking to put their deleveraging plans on pause as they invest to catch up to T-Mobile.
