Investors fear AT&T, Verizon overspending for airwave licenses
Alarm bells are starting to go off on Wall Street, as bidding levels in the latest government spectrum auction are flying into the stratosphere.
The higher-than-expected spending has analysts and investors worried. Shares of AT&T (T) are down 3% over the past week, while Verizon (VZ) has slumped 4% amid concerns that the two largest mobile carriers will be stretched to cover their bids while maintaining dividends and capital spending plans. On the flip side, investors are re-evaluating upwards the value of similar licenses already held by Dish Network (DISH), with its shares up 15% over the past week.
Total winning bids at the ongoing Federal Communications Commission’s AWS-3 auction hit almost $35 billion after Friday's action, more than double what Wall Street analysts expected before the auction opened, and are still rising at a rate of over $500 million per day. The daily auction began on November 13 and continues day after day, until participants stop raising their bids.
The names of leading bidders are not disclosed until the auction ends, but AT&T and Verizon are the expected leaders, with T-Mobile (TMUS) and Dish also likely involved. Sprint (S), struggling to get its house in order under a new CEO, sat out this round.
The big telecomm carriers will probably find a way to finance their purchases, most likely by issuing new debt or equity, but both AT&T and Verizon are already somewhat stretched. Analysts doubt they will be able to earn an attractive return.
The higher bids mean “a higher cost for wireless companies to operate their mobile networks,” Citi Research analyst Michael Rollins wrote in a report on Monday. “Meanwhile, price competition has heated up [and] threatens the ability for carriers to get paid for rising data consumption.”
Rollins cut his rating on Verizon to neutral from buy and maintained a neutral rating on AT&T. Morningstar analyst Michael Hodel said last week he would likely cut his fair value estimates for the companies, as well. “We question the carriers' ability to collectively earn attractive returns on incremental spectrum investments,” Hodel wrote. “If AWS-3 bidding continues to charge forward, we are likely to reduce our fair value estimates for the winning bidders.”
AT&T has seen significant pressure on its cash flow already, Craig Moffett at MoffettNathanson writes in his review of the auction. AT&T’s free cash flow of $11.1 billion over the past 12 months included cash proceeds from receivables of $1.4 billion and other working capital improvements that may be difficult to duplicate, he notes. Meanwhile, AT&T’s annual dividend requires $9.5 billion.
“In other words, participating in this auction has likely wiped out a year’s worth of cash flow,” he warned.
Dish Network already owns licenses for spectrum close to the frequencies being auctioned. But as the satellite television service has yet to make much headway in mobile communications, Moffett questions whether Dish will be able to turn its paper gains into real profits.
UPDATE: A number of analysts who follow DISH are upgrading or talking up the stock on Monday, as the shares continue to rise, hitting an all-time high of $76.29 before dropping back to $75.30. The company's spectrum should be more valuable than the airwaves being auctioned because it can be used more flexibly and immediately by an acquirer, Jonathan Atkin at RBC Capital writes. He raised his target on the stock to $81 from $69.
