With the FCC incentive auction to reapportion low-frequency (600 MHz) radio spectrum from television broadcasters to wireless carriers just around the corner, T-Mobile (NASDAQ:TMUS) is building up its war chest. The third largest U.S. carrier recently entered into a purchase agreement with its parent company, Deutsche Telekom, allowing it to sell $2 billion of senior notes by the end of the year.
T-Mobile CFO Braxton Carter previously said the company has the flexibility to spend as much as $10 billion in the incentive auction, but that he thinks it will only take $1 billion to $1.5 billion to get what the company needs. The purchase agreement with Deutsche Telekom provides some extra insurance that T-Mobile will be able to afford whatever it needs in the upcoming auction.
What exactly does T-Mobile need?
T-Mobile already has a small portfolio of low-band spectrum (700 MHz) that it acquired in a deal with Verizon (NYSE:VZ). But T-Mobile is looking to expand its portfolio to reach metropolitan areas where it doesn't have any low-band spectrum and supplement areas with high data demand.
The FCC has already agreed to set aside 30 MHz of spectrum in each region to smaller carriers, essentially locking out Verizon and AT&T (NYSE:T) from those reserves. While T-Mobile can't buy all 30 MHz because of FCC rules, it can snatch up a good amount of spectrum at a lower price. Still, the smaller carrier may find itself bidding against the big two for additional spectrum licenses.
T-Mobile management has pointed to this auction as critically important. It will be the last spectrum auction for some time, which means carriers will have to look to the private market to supplement their existing spectrum portfolios. And with the way spectrum licenses have appreciated as wireless data usage explodes, those licenses are bound to get more expensive. Extra cash reserves of $2 billion could ensure that T-Mobile comes out of the auction a big winner.
The state of the competition
Both AT&T and Verizon depleted a significant portion of their budgets on last year's AWS-3 spectrum auction. AT&T spent a whopping $18.2 billion and Verizon spent $10.4 billion. That leaves them with significantly less to spend on this year's auction.
Analysts originally expected the FCC to raise $45 billion to $85 billion in bids this year, but they have since revised those estimates downward as AT&T and Verizon don't look to have the same willingness to spend cash this time around.
The biggest companies qualifying as "small carriers" are Comcast (NASDAQ:CMCSA) and DISH Network (NASDAQ:DISH). Comcast management said it would "take a paddle" but would purchase spectrum only at a good price. In other words, Comcast probably won't bid more than the FCC's reserve for certain spectrum in specific regions. DISH Network, meanwhile, is reeling after the FCC slapped it with a half-billion-dollar fine and took back $3 billion worth of spectrum from the AWS-3 auction.
Other small companies have a good amount of cash at their disposal as well. Startup Rama, which is currently focused on spectrum in emerging markets, has said it will participate in the auction. The CEO said it could spend as much as $4 billion to $10 billion thanks to backing from venture capitalist firm Social Capital.
T-Mobile also has $7.5 billion in cash and short-term investments on top of the $2 billion it can tap in debt from its parent company. As the company turns cash flow-positive, it could even afford to outbid its reserves. That would make it one of the biggest bidders in the auction, probably higher than Verizon, and put it in a very strong position with its spectrum portfolio for the foreseeable future.