When the Federal Communications Commission kicked off the auction for AWS-3 wireless spectrum licenses, it set a total reserve price of $10.6 billion. That figure seemed high at the time, and even the most optimistic analysts didn't expect Auction 97 to add more than $20 billion to federal coffers.
Six weeks later, the spectrum auction has ended after 341 bidding rounds over 45 days, and the winning bids added up to an astounding $44.9 billion.
Compare that with the auction for former analog TV spectrum in 2008, upon which AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) built their dominant networks in the high-quality 700-megahertz range. That auction also had a $10 billion reserve price, but it ran out of steam with just $19.6 billion on the books. This latest sale of weaker spectrum properties more than doubled the 2008 auction's cash pile.
Wait, what just happened here?
When the auction started, I expected AT&T and Verizon to run away with most of the spectrum licenses. Sprint (NYSE:S) had already decided to sit this auction out altogether, saving its capital reserves for a much more attractive spectrum auction to be held in 2016. T-Mobile (NASDAQ:TMUS) was in for the ride, but I expected no more than token bids from the Uncarrier -- the spectrum at issue here happens to be the same low-quality type that mirrors much of what T-Mobile already owns.
Close, but no cigar. Let's check out what actually happened.
Going once, going twice, sold!
Verizon and AT&T did, in fact, run away with the lion's share of AWS-3 licenses. But T-Mobile did much more than just some token bidding to raise auction prices. It landed a respectable amount of fresh licenses for its own use. And then there's the dark horse, DISH Network (NASDAQ: DISH), which spent less money than the big telecoms, but took home the most license slices anyway.
AT&T spent $18.2 billion to win the day and will fund this splurge through the sale of fresh debt papers. Credit ratings service Moody's was already reviewing AT&T's rating to see how the proposed DirecTV merger's additional debt might affect its long-term creditworthiness. But the returns on this $18 billion investment will be slow, given AT&T's healthy portfolio of far more attractive spectrum licenses, so Moody's just lowered AT&T's overall credit rating anyway.
"The debt-financed spectrum purchase will increase leverage such that the DTV acquisition will now be approximately neutral to AT&T's credit metrics, and even if the DTV deal does not close, AT&T's Baa1 rating will remain appropriate," the firm said. "Moody's believes that AT&T will face challenges in meeting its capital requirements while maintaining its high dividend payout and that, over time, the current level of dividends will prove to be unsustainable."
Moving down one notch from A3 to Baa1, AT&T now sits three downgrades away from a speculative "junk bond" rating. And the telecom is on a negative ratings watch, even so.
Verizon comes next with a $10.4 billion auction budget. Like AT&T, Big Red mostly splurged on expensive license blocks in major cities where this AWS-grade spectrum is reasonably useful. But Verizon won't raise debt to pay off its auction tickets. Instead, the company is looking to sell some $15 billion worth of wireline operations and cell phone towers. According to The Wall Street Journal's anonymous sources, Verizon could announce several such sales to a variety of buyers as soon as later this week.
And then there's DISH...
DISH placed bids worth $13.3 billion but intends to use a discount program to knock that bill down to an even $10 billion.
Under the FCC's designated entity program, small businesses can score a 25% discount on asset sales like this auction. These entities include businesses owned by women or minorities, as well as rural telephone companies.
DISH qualified for that status by funneling its bids through two companies created for this purpose. In auction-related paperwork, Northstar Wireless LLC is shown as a small telco with less than $15 million in annual revenues, headquartered in Alaska with zero employees and wholly owned by DISH -- or, rather, owned by other intermediaries with various connections to DISH. SNR Wireless LicenseCo LLC is another take on the same multi-layered idea, with no business or payroll to speak of and a headquarters address in Virginia. Again, DISH owns 100% of this company -- but you'll get a headache tracking this information down.
One FCC commissioner complained that DISH is abusing this small-business credit, but the objection is not likely to change the auction's outcome. DISH disclosed its bidding structures well ahead of time for official review, which makes a reversal highly unlikely. Moreover, the company claims that AT&T and Verizon have used similar strategies in FCC bidding events past, and those attempts weren't slapped back, either.
It's unclear how the satellite broadcaster plans to use its spectrum licenses. Some analysts expect DISH to build out its own wireless communications network, supplementing its satellite signals with a more flexible second data source. Others believe that DISH will turn around and sell some of its licenses to true telecoms, making a creative capital-raising project out of this auction. I'm expecting DISH to start building its own network with this handful of spectrum deals. The company already held a respectable license portfolio before this auction, and DISH Chairman Charlie Ergen is famous for his empire-building mindset.
But something needs to happen to DISH's newly won spectrum. The auction rules specify that 40% of the population in each service area must have access to "reliable signal coverage" within six years, and the threshold rises to 75% at the end of the original 12-year license period. The licenses can then be renewed for another decade with no additional coverage requirements in that extended period.
Let's not forget the little guy
Finally, T-Mobile grabbed 151 of the 1,600 auctioned licenses with a small $1.8 billion budget. It still feels as if Magenta just wanted to keep the big bidders on their toes, and maybe hold on to just a handful of slices where it makes sense. With these airwaves under its belt, T-Mobile will be able to improve its service quality in many rural areas. The company also spent $200 million on a beachfront piece of Miami spectrum, for example, but that's still just one-third of what AT&T spent in the same market.
So yeah, T-Mobile really did hold back. The company can simply grab $1.8 billion from its balance sheet, without even asking its German mothership for assistance. The real action for both T-Mobile and Sprint will come next year, when the 600-megahertz auction looks set to change the wireless industry forever.