If you've been wondering how Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) plan to pay for their massive spectrum auction bids, the answer is twofold but very simple. AT&T is largely issuing new debt to balance out that $18 billion expense; Verizon prefers to sell off surplus assets to finance its $10 billion spectrum spree.
In fact, Verizon is lightening its asset portfolio more than the spectrum auction would require. In a couple separate deals, Big Red is raising more than $15 billion via asset sales. That choice was forced on Verizon by a smothering $108 billion long-term debt balance.
By contrast, AT&T's debt portfolio stops at just $70.5 billion, but then Ma Bell didn't have to spend $130 billion to buy its own wireless network back from a foreign partner. That's why AT&T is willing and able to take on new debt today while Verizon can't and won't.
I'm talking about Verizon's hardwired interests in Florida, California, and Texas -- three massive markets that will more than double Frontier's annual revenue in one fell swoop. These three states represent one-third of Verizon's consumer wireline operations. The bundle going to Frontier includes not just the rapidly shrinking copper-based phone line business, but also the growing FiOS fiber-based Internet and digital television service.
Fifty-four pecent of the transferred territories already support FiOS products, leaving Frontier with an easier path toward blanketing its markets in high-speed fiber coverage. In case you missed it, the FCC just raised the bar for what service providers can market as "broadband," and it's almost impossible to qualify for the new limits with DSL signals delivered over twisted pair copper wires.
That means fiber is the only reasonable way forward. Frontier's fiber coverage currently stops at just 10% of the homes it serves. Fiber installations can be both slow and expensive, so the deal with Verizon is a shot of adrenaline right into Frontier's next-generation ambitions.
But wait -- there's more!
American Tower is buying a handful of Verizon's towers and leasing the rights to over 11,000 sites. The average term of these leases is 28 years, with built-in sublease agreements guaranteeing Verizon some space in these towers for at least a decade ahead. At the end of these contracts, American Tower can choose to buy the towers outright, but the subleases will live on. Taken to their full term, some contracts could last for 50 years.
Here, Verizon is taking a quick cash payment and reducing its wireless operating costs for the foreseeable future. In return, American Tower grows its domestic tower count by 40% and will finally match chief rival Crown Castle International's (NYSE:CCI) American tower count. American Tower CEO Jim Taiclet called the Verizon towers "under-utilized," and said he looks forward to reselling this new capacity across all four of the major wireless carriers.
This deal is very similar to the 2013 agreement under which AT&T unloaded more than 9,000 sites to the tower operator.
Verizon probably should apply the extra $5 billion to paying down some of its stifling debt load, but it has chosen a different path. In the same press release, Verizon also announced a $5 billion boost to its share buyback program.
To put that move into perspective, Verizon could reduce its share count by about 2.5% by using up that allowance at current market prices. In just the past year, Verizon's stock has moved that much or more in a single day on five different occasions. If I were a Verizon shareholder, I'd much prefer a chunky debt repayment here.
Recapping what's in it for everyone involved: Verizon is dumping some $15 billion of its assets to pay for spectrum licenses and a hefty buyback program. These deals are potentially game changing for the buyers, since Frontier more than doubles in size overnight and American Tower grows its American presence by 40%.