Verizon Wireless has received the approval from the Federal Communications Commission (FCC) to purchase $3.9 wireless spectrum from a group of cable companies. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD).
With all regulatory approvals now obtained, Verizon will buy 122 radio (or Advanced Wireless Service) spectrum licenses covering 259 million Americans for $3.6 billion from SpectrumCo, a group of cable companies including Comcast Corp. (CMCSA), Time Warner Cable (TWC) and Bright House Networks. The company will purchase $2.3 billion wireless spectrum from the country’s largest cable provider, $1.1 billion from Time Warner Cable and $0.2 billion from Bright House networks.
Additionally, the company will acquire the 20 MHz Advanced Wireless Service (AWS) licenses from Cox Communications covering 28 million Americans in cities including Boston, New Orleans, Jacksonville, Florida, Phoenix, San Diego and Las Vegas for $315 million.
The transaction has reformed the overall telecommunication industry when demand for smartphones is at its peak. We believe the new spectrum would boost Verizon’s capacity to offer services at a much-higher speed, thereby boosting data revenues. The purchase would double the current number of Verizon airwaves available for Long Term Evolution, a 4G network.
The FCC approved the transactions to resolve the spectrum crunch, to a certain extent, which is considered a major issue in the wireless industry. The carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds, with limited capacities. The sanction also follows the approval from the Department of Justice (DOJ) last week with certain conditions to control unfair competition and higher prices to consumers.
Under the agreements, cable operators will market Verizon’s services and products and in some cases sell their own services inside Verizon’s stores. On the other hand, the U.S. wireless leader will sell products and services of cable operators in areas where it does not sell its own products. Verizon already offers FiOS television and Internet services to its consumers, giving strong competition to cable operators.
Additionally, Verizon Wireless has to deploy its services to at least 30% of the population covered by the spectrum it is buying within three years and would extend its coverage to 70% within seven years.
Further, Verizon has to proceed with its plans to swap radio spectrum with the fifth largest wireless service provider T-Mobile USA, a unit of Deutsche Telekom (DTEGY) and swap wireless airwaves with the low-cost wireless service provider Leap Wireless (LEAP).
These new sets of spectrums will strengthen Verizon’s competitive position against its major rivals Sprint Nextel Corp. (S), which is a turnaround story, and AT&T Inc. (T), which is still in need of additional airwaves.
We believe the spectrum deals would be accretive to Verizon in the long term. But it might put pressure on the balance sheet in the short term by reducing cash balances and increasing capital expenditures.
We are maintaining our long-term Neutral recommendation on Verizon. Currently, the stock retains the Zacks #3 (Hold) Rank for the short term (1-3 months).
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