Are Spectrum Prices Out of Whack?

Equity valuations of Sprint, T-Mobile US and Dish Network seem out of line with the theoretical value of their spectrum holdings. Something does not seem right. Either the market is mispricing those firms, or the market is overvaluing spectrum assets.

It seems like the spectrum valuation is the mistake.

U.S. mobile service provider Dish Network Dish Network is gambling in a big way with its spectrum strategy, assuming it can monetize its mobile spectrum assets in some way.

The fact that some analysts believe 80 percent of the company’s equity value now rests on the deployment of that spectrum for commercial purposes illustrates the magnitude of the gamble.

Dish has assembled a portfolio of about 55 MHz of spectrum to support Long Term Evolution networks, but faces a 2017 deadline to get 40 percent of that spectrum activated, allowing mobile customers to buy service.

If it misses that deadline, Dish Network must deploy enough of its spectrum to reach 70 percent of U.S. consumers by 2020.

If not, Dish loses the spectrum, and possibly 56 percent to 80 percent of its market value.

Dish Network assumes it can either sell its spectrum for $25 billion to $45 billion, create a wholesale mobile business using the spectrum, or perhaps buy one of the U.S. mobile operators.

Dish will get no help from AT&T or Verizon. Sprint and T-Mobile US are viewed as possible partners. But Sprint, T-Mobile US and Verizon are viewed as the likely actors, for any Dish move.

T-Mobile US has been viewed as an acquisition target for Dish Network. Sprint has been viewed as a partner, leasing network facilities to Dish Network so spectrum can be converted into retail capacity.

Verizon has been seen as a buyer of Dish Network Spectrum.

There is a potential obstacle, though. The value of Dish Network’s spectrum, in the wake of prices paid in the recent AWS-3 spectrum auction, are high enough to make any purchase transaction for Dish Network spectrum very costly.

In fact, that auction featured the highest prices ever paid for mobile spectrum. Based on those recent precedents, some expect the 2016 auction for 84 megahertz worth of 600 MHz spectrum
could cost between $15 billion and $30 billion.

That upcoming auction is a part of the very-complicated spectrum acquisition picture. AT&T spent $18 billion in the AWS-3 auction; Verizon about $10 billion. A 2016 auction would require each firm to raise more debt, something neither is keen to do, and which neither Sprint nor T-Mobile US can afford, either.

But other spectrum conceivably will be made available. Shared spectrum in the 3.5 GHz band, new Wi-Fi spectrum in the 5-GHz band and then additional spectrum in the millimeter bands all are expected to be made available for commercial use, at some point.

Also, some spectrum presently not considered available for sale, including low power TV spectrum, could be considered for auction as well. In light of the AWS-3 auction prices and the upcoming 600-MHz broadcast TV spectrum auction, some within the low power TV business think they should have the ability to sell their TV spectrum as well.

There are, in 210 TV markets, 2,650 low-power TV licenses, representing an aggregate 15,900 MHz of spectrum, according to Mike Gravino, LPTV Spectrum Rights Coalition director.

Based on the AWS-3 auction prices, that spectrum might be worth $50 billion dollars, Gravino said.

There are lots of moving parts.

So one way of looking at matters is that, were Dish Network to sell, at AWS-3 prices, that spectrum might cost  $56 billion to $80 billion. The 600-MHz auction might add another $15 billion to $30 billion.

Sprint has talked about selling some of its excess 2.5-GHz spectrum. At AWS-3 prices, that implies a possible value of $155 billion, far in excess of the current market value for all of Sprint, about $21.3 billion.

Also, consider that T-Mobile US just spent $10 billion on AWS-3 spectrum. T-Mobile US current market capitalization is about $26.5 billion.

A rational person might conclude that something is out of whack, and that the likely problem is spectrum valuations, which are too high.

Spectrum valuations might be so costly, in fact, that many conceivable options for buying or selling spectrum might be beyond reach.
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