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As C-band bidding slows, telco debt expected to skyrocket

Bidding in the FCC's auction for C-band spectrum for 5G has slowed dramatically in recent days, indicating overall gross proceeds likely won't go much higher than the $80.7 billion generated through round 72.

"It is impossible to know how many more rounds this auction will continue," wrote Ari Meltzer and Rick Edelman with telecom law firm Wiley in an auction update sent to members of the media Friday. The analysts noted that "it does not appear that the end is yet imminent," given the relatively low prices for spectrum licenses in markets such as Bangor, Maine, and West Plains, Missouri.

To hasten the end of the auction, the FCC on Monday announced it will increase the number of bidding rounds it will hold per day from five to seven. When bidding activity stops, the auction will end. Roughly a week after the auction ends, the FCC is expected to identify the winning bidders.

Nonetheless, some auction participants now appear to be working to find the cash they may need to back up their eye-watering bids. For example, T-Mobile on Monday announced plans to borrow up to $2 billion, in part to potentially purchase additional spectrum.

Incredibly, the financial analysts at New Street Research argued that T-Mobile's announcement could indicate that Verizon and AT&T might be spending even more than the $35 billion and $18 billion, respectively, that the analysts forecast last week.

"T-Mobile is raising another $2 billion in debt. This brings their auction war chest to $11 billion, which is well below our most recent estimate for their auction spend of $18 billion," New Street analyst Jonathan Chaplin wrote in a note to investors Monday. "The auction proceeds are more or less locked in at this stage; T-Mobile will know how much they are on the hook for. ... If T-Mobile spends less than we expect, Verizon or AT&T will likely account for the shortfall. Neither company has the cash on hand to cover what we expect them to spend in the auction at present; we would expect more debt issuance for the group in coming weeks."

Importantly, the financial analysts at MoffettNathanson warned in a note to investors Monday that the sky-high prices in the C-band auction could position US operators to face the same kinds of crushing debt that ruined many European operators after they collectively spent $129 billion on 3G spectrum licenses in the early 2000s.

"Operators were left with crippling debt burdens, taken on for spectrum portfolios they had no way of monetizing," the analysts noted of European operators two decades ago. "Then, as now, a new generation of wireless technology promises new revenue opportunities."

However, the analysts wrote that the US market in the 5G era is not exactly like the European market in the 3G era.

"Verizon and AT&T are trading at just half the market multiple; no one can argue that they are subject to the extravagant expectations that burdened the European industry twenty years ago," they noted. "Moreover, the magnitude of the current C-band auction relative to industry cash flow pales in comparison. And the accommodative interest rate environment today skews this comparison some more. Indeed, given that spectrum is tax deductible for cash tax purposes (straight line over fifteen years), it is not inconceivable that the tax shields from spectrum purchases will exceed the ultra-low debt carrying costs, making the purchases (bizarrely) free cash flow accretive."

They concluded: "Then as now... debt must eventually be repaid."

Others are voicing similar concerns. "I just worry that the size of the investment that the operators are making is going to suppress the [network] build. The build is more important, I think, to the US than the money going directly to the [US] Treasury" from the C-band auction, Nokia's new US chief, Ed Cholerton, told Light Reading last week.

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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