Wireless carriers have bid an unprecedented amount of money in the FCC's latest wireless spectrum auction. As of Thursday, AT&T (NYSE: T), Verizon (NYSE: VZ), T-Mobile (NASDAQ:TMUS), and others had pushed the bid total to $44.3 billion for various blocks of AWS-3 spectrum. Bids are anonymous and the winners won't be known until the auction ends.
The $44.3 billion is well above what many analysts expected the auction to raise. Before bidding started estimates ranged from just over the FCC's reserve price of about $10.6 billion up to $22 billion. In January, T-Mobile swapped spectrum with Verizon including licenses with an average value of $1.72 per MHz-Pop. Through 115 rounds of bidding, the average price at auction has been $2.78 per MHz-Pop for similar spectrum licenses. All this means the value of the companies' existing spectrum portfolios is probably worth more than investors thought about a month ago.
While T-Mobile's spectrum holdings aren't quite as expansive as those of AT&T or Verizon, the company holds some very valuable airwave licenses. In fact, based on the current auction, T-Mobile's spectrum holdings are worth more than the company's entire enterprise value.
Since the start of the auction in mid-November, wireless carriers as a whole have been pummeled by the market. Concerns over higher spectrum costs have outweighed the increase in value of existing spectrum portfolios. That's why noncarrier spectrum holders such as DISH Network have increased share price even as wireless carriers have lost market value.
Many expect T-Mobile is holding out for the low-band spectrum set to go on the auction block in 2016. Many expect T-Mobile will spend about $1 billion in the current AWS-3 auction, versus much larger investments from AT&T and Verizon. T-Mobile just sold $1 billion worth of convertible preferred stock partly to fund the spectrum purchase.
T-Mobile can certainly afford to hold out until 2016. It is still building out its 700 MHz spectrum, and starting next year will redeploy its CDMA spectrum acquired with MetroPCS. T-Mobile is also positioning itself to redeploy its 3G spectrum as 4G/LTE as it transitions more customers to higher speeds over the next year or two.
Of course, that low-band spectrum is going to cost T-Mobile when it comes up for auction, which is what investors are likely worried about. Indeed, analysts expect the company might have to spend as much as $10 billion, based on current prices, to acquire spectrum licenses most suitable for a wider LTE rollout.
Priced below market value
If T-Mobile were to sell all of its spectrum licenses at market prices (based on the current auction), it could command a hefty premium. In fact, Craig Moffett of MoffettNathanson believes T-Mobile's spectrum portfolio is worth 31% more than the company's current enterprise value. In other words, the market thinks T-Mobile's operations are having a negative effect on the company's value.
But T-Mobile is the fastest-growing carrier in the country, and analysts expect the company's aggressive tactics to start paying off next year with significant earnings growth and positive free cash flow. In fact, AT&T and Verizon warned investors that fourth-quarter earnings could come in below prior expectation due to higher than expected churn. The implication is that customers are abandoning the bigger carriers for T-Mobile and Sprint.
With significant growth expected for T-Mobile in 2015, its enterprise value-to-forward EBITDA ratio has now fallen below both AT&T's and Verizon's. That should not be the case, considering that T-Mobile's growth prospects are much better than those of both larger carriers.
A big takeover premium
While T-Mobile has been part of several acquisition talks, the company has yet to agree to a deal the FCC will approve. The stock dropped significantly earlier this year after talks with Sprint fell through, but there are other potential suitors looking to acquire spectrum and carrier operations -- for example, DISH Network.
If someone were to buy T-Mobile, the company could command a significant premium based on its spectrum portfolio alone, not to mention the 50 million-plus customers it serves throwing off cash every month. For investors, T-Mobile looks undervalued after the $1 billion secondary offering pushed share prices down and the AWS-3 auction pushed the company's asset portfolio higher.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications,. 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.