German Regulations Could Complicate T-Mobile Pursuit of Incentive Auction Spectrum

T-Mobile Chief Financial Officer Braxton Carter said at a recent Deutsche Bank financial conference T-Mobile could spend as much as $10 billion in the incentive auction. But Carter also said that T-Mobile’s main objective is making sure it has low-band spectrum in every U.S. market, and that means buying spectrum mainly in rural areas. The 700 MHz spectrum T-Mobile has purchased from Verizon and other companies already covers a little more than 190 million POPs, he said. Carter estimated that filling out the footprint probably wouldn't cost more than $1.5 billion.

“One of the things that you have always seen with T-Mobile is that we’re extremely disciplined when we approach these transactions and we have to be,” Carter said. “We don’t have the balance sheet and the latitude to go and willy-nilly spend at huge valuations. … We don’t have the balance sheet of AT&T and Verizon.” In the AWS-3 auction, Carter said, T-Mobile’s “envelope” for bidding was much larger than what the carrier ended up spending -- $1.8 billion, making it the fourth-largest bidder in the auction after AT&T, Dish Network and Verizon (see 1501300051). Industry officials said T-Mobile likely would have bid more, but Dish’s designated entities targeted many of the licenses most of interest to T-Mobile.

“One constraint on how much T-Mobile USA can spend is how much debt Deutsche Telekom can carry based on German regulations,” said Berge Ayvazian, analyst at Wireless 20/20. “T-Mobile does appear to be most focused on buying low-band spectrum mainly in suburban and rural areas beyond the 190 million POPs purchased from Verizon.” Ayvazian said he agreed that will cost around $1.5 billion.

“I suspect Deutsche Telekom will only give T-Mobile enough financial backing to get what's necessary at this point,” said Jan Dawson, analyst at Jackdaw Research. “Given how clearly Deutsche Telekom eventually wants to sell off T-Mobile, I think they'll be wary of over-committing resources to spectrum purchases that won't have a meaningful positive impact for several years. I could certainly see T-Mobile investing significantly to fill in gaps in its current coverage, but I can't see it spending massively beyond that.”

T-Mobile’s needs have to be viewed in the context of the “wireless value chain,” said Jim Patterson, analyst at Patterson Advisory Group. He said it’s hard to see a scenario in which T-Mobile doesn’t “go big” in the auction. “More low-band spectrum means less towers,” he said. “With AT&T and Verizon in the auction, 600 MHz spectrum means phone compatibility which lowers handset costs and likely improves residual values for leased devices. Most importantly, however, a strong 600 MHz result allows T-Mobile to operate a network that performs at parity with AT&T and Verizon.”

More low-band spectrum opens the door to T-Mobile acquiring more high-value family plan customers, Patterson said. “A nationwide 600 MHz network could also improve their value proposition for enterprise and IoT solutions.”

Roger Entner, analyst at Recon Analytics, estimated that T-Mobile will try for nationwide spectrum in the 600 MHz band. “It has to put the 600 MHz electronics in every phone, so getting as much coverage as possible is logical,” Entner said. With Sprint out of the picture, $10 billion might be enough to meet that goal, since T-Mobile has more ability to get financing than any other smaller competitor, he said.

“There are not that many, if any, entities willing to invest many billions in an increasingly regulated market, with the possible exception of some financial investors with no interest in ever building out by themselves,” Entner said. “With its AWS-3 win, Dish essentially doubled its debt load. Looking at it holistically, this highlights the valuation conundrum the incentive auction is in.” If T-Mobile can buy lots of spectrum for $10 billion, it means lower payouts for broadcasters and raises the specter of a failed auction, Entner said.