It’s pretty important for Sprint Nextel’s future that it steals a march on its larger cellular rivals and so the deal to create the Clearwire joint venture has to go through rapidly, and the money that is going to pay for its full scale roll-out needs to be in the kitty as soon as possible. So naturally Verizon and AT&T, both planning LTE networks up against Sprint’s WiMAX technology, would rather that didn’t happen, which is perhaps why AT&T has had the temerity to file a petition with the FCC to bar the merger.
It is particularly galling considering the mergers which AT&T got permission to carry out, to get it into the shape it is today, complete with the namby pamby conditions imposed on its mergers between SBC and AT&T and subsequently with Bellsouth.
Sprint Nextel agreed earlier this year to put its Xohm unit – home of its WiMAX network, 2.5GHz spectrum and open access mobile broadband vision – into a $14.5 billion joint venture with Clearwire, owner of the other major US 2.5GHz WiMAX business, with backing from Intel, Google and three cablecos.
The move was important so that concerned shareholders had the bulk of build out for the WiMAX network no longer resting entirely on their shoulder. For Sprint it reduced the risk and cost attracted powerful backers and gave it something to offset against the slow decline of its core CDMA business.
This was even more important once AT&T and Verizon snapped up the premium 700 MHz spectrum to go with the assets they already hold.
AT&T clearly sees Clearwire as a greater competitive threat than the wounded Sprint would have been on its own, especially with the participation of three cable operators ‘ Comcast, Time Warner Cable and Advance/Newhouse. AT&T and Verizon see the cablecos as the greatest challenge to their own DSL/fiber/3G/LTE roll-outs for quad play and fixed/mobile broadband.
Whatever it has filed with the FCC, it is only by adding the triple play of the joined ranks of the cable operators with a single mobile entity, to produce another quadruple play in the US, that there can be any resistance to a US wide telecommunications monopoly, so this deal has to go through one way or another. But what AT&T can hope to do is at least delay it, and the best way of doing that is to have the FCC pass a motion to enforce some divestment of the Sprint spectrum.
In its filing, the largest US telco argues that the proposed merger, “openly states that Sprint Nextel and Clearwire intend to compete with other national wireless providers – including AT&T – yet they fail to make the required showings necessary for the Commission’s review.
The company is basing its objections largely on FCC rules on the amount of spectrum an operator can hold in any market, the ‘spectrum screen’ that is also being used by opponents of Verizon’s planned acquisition of Alltel. Smaller rural operators are particularly disadvantaged when the larger carriers amass large spectrum holdings, and some of these are supporting AT&T against Clearwire, calling for the spectrum screen to be applied.
‘AT&T submits that the Commission’s prior treatment of mergers and competitive combinations in the mobile services market compels the application of the initial spectrum screen to the New Clearwire applications. And, in so doing, consistency and logic dictate that the BRS/EBS spectrum held and controlled by the applicants must be considered,’ stated AT&T, referring to Sprint’s and Clearwire’s 2.5GHz holdings.
The FCC eliminated spectrum caps in 2003, but currently applies a spectrum screen in wireless transactions to assess any potential anti-competitive problems in markets where combined wireless assets (in any bands) exceed 95MHz, as the new Clearwire’s would in many areas. However, the regulator decided when it devised the spectrum screen that it would exclude AWS and BRS frequencies from an operator’s total, because airwaves in both areas are not significantly available throughout the country due to relocation and band realignment issues. AT&T argues that is no longer a valid point of view because Sprint and Clearwire have amassed such vast holdings across the country. The FCC can still examine AWS and BRS spectrum holdings on a case-by-case basis in situations where the 95MHz per market limit is exceeded, but doing so is discretionary.
Though a block on the joint venture is unlikely, any delay or uncertainty is harmful, and will further knock the current Clearwire’s share price, which has been suffering lately anyway. Its stock hit a 52-week low on the Nasdaq last Tuesday, dropping as low as $8.98. The shares have generally been falling in price since early June but started to dip below the $10 mark at around July 17 and have remained depressed since. This is despite recent upgrades from analyst houses RBC Capital Markets and Citigroup, which set target prices of $17 and $13 respectively.
Meanwhile question marks surround another US WiMAX champion, NextWave Wireless, and its ability to fund its business model. The company recently held a sale of its US spectrum holdings, mainly in 2.5GHz, 2.3GHz and AWS, planning to drop its ambitions to be an operator and to use the proceeds to support its development of chipsets and equipment for WiMAX and potentially LTE. However, the company raised only $150 million from the sale, and said it would use these funds to pay down and collateralize debt, rather than support ongoing operations ‘ a statement that sparks doubts over the company’s ability to raise sufficient cash for its ambitious product roadmap.
The spectrum that NextWave did sell went at a reasonably good price, but only 13% of the company’s assets were purchased, and securities analysts at JRPG believe the vendor either had insufficient or no bids on the remaining portion of the spectrum, bringing into question their ability to sell the spectrum in the future.
The licenses that did sell were all in the AWS band, in which NextWave offloaded 63% of its holdings in terms of MHz/pop, to four operators. T-Mobile was the biggest taker, paying $97.5 million for franchises in parts of Pennsylvania, Maryland, Delaware, Virginia, West Virginia, Kentucky, Ohio, Tennessee, Georgia, North Carolina, Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Oklahoma, Kansas, California, Puerto Rico and the US Virgin Islands. T-Mobile has been building up its spectrum hoard as it starts to build out HSPA and tries to catch up with the big three carriers.
The other buyers were Atlantic Wireless, ACS (Alaska) Wireless and flat rate operator MetroPCS. Between them, these three paid $52.6m. The geographic areas covered by the licenses include markets in Indiana, Kentucky, Illinois, Ohio, Alaska, Georgia and Florida.
In all, the agreements saw NextWave selling 599m MHz/pops of AWS spectrum at an average price of $0.25 per MHz/pop. A total of $75m of the proceeds will be deposited into a restricted cash collateral account and $75m will be used to redeem loan notes. After the sale, the company will still possess 348m MHz/pops of AWS spectrum primarily in New England, Florida and California. NextWave acquired all its AWS licenses for a total of $115.5m, or $0.12 per MHz/pop, at the FCC auction in 2006.
The company still has other spectrum that has not yet been put on the block. It still holds 2.8bn MHz/pops of 2.3GHz WCS spectrum, 972m MHz/pops of 2.5GHz BRS/EBS spectrum, and 5.9bn MHz/pops of spectrum in Europe, Canada, and South America. It has retained Canaccord Adams to sell its Canadian spectrum assets and is likely to look to sell its other US frequencies soon. ‘The sale of our AWS spectrum is just the first step in maximizing the value of our spectrum portfolio,’ said CEO Allen Salmasi. ‘We will continue to monetize our remaining spectrum assets in the US and are working with Deutsche Bank and UBS Investment Bank to achieve our spectrum sale objectives.’