Updated to reflect Evercore Partners analyst comments starting in the fifth paragraph.
AT&T (T) was the government's antitrust punching bag in 2011 after regulators blocked a $39 billion merger with T-Mobile USA. Now with AT&T on the deals sideline, Verizon's $3.6 billion December purchase of wireless spectrum from a joint venture held by Comcast (CMCSA), Time Warner Cable (TWC) and Bright House Networks is now in the crosshairs, according to analysts and previous Bloomberg reports.
For more on how antitrust issues are changing the telecoms space, see why AT&T's M&A fail is a game changer."We believe that the FCC may look to block or modify VZ's planned acquisition of AWS spectrum licenses from SpectrumCo and Cox due to its escalating concerns about spectrum concentration," writes Deutsche Bank analyst Brett Feldman in a February note. "While the deal looks like it should sail through based on the regulator's historical application of spectrum screens, we see risk that the FCC lowers the screens when evaluating this deal," adds Feldman. Factors like the FCC's ability to change its anti-competitiveness screening guidelines and statements to Congress that screens may be adjusted, in addition to Verizon's existing spectrum dominance put the lockup ups in question, according to Feldman. Such a regulatory aversion to spectrum purchases could also be a headwind for Dish Networks (DISH) and AT&T (T) who might try to cut spectrum deals, while it may allow for acquisitions by Sprint, T-Mobile, MetroPCS (PCS) and Leap Wireless (LEAP), adds Feldman. In doing regional screening analysis of acquisition attempts by AT&T, the FCC appeared to alter its methodology when considering a suit against the T-Mobile tie-up and a separate approval of a $1.8 billion purchase of spectrum from Qualcomm (QCOM), according to Jonathan Schildkraut of Evercore Partners. Meanwhile in December, Bloomberg reported that the U.S. Department of Justice may bring an antitrust challenge to Verizon's spectrum pick up, citing unnamed sources who say that the deal could be a restraint of trade. In August 2011, the DoJ issued a formal anti-trust challenge against AT&T in its T-Mobile acquisition, which precipitated the eventual deal breakup. However, many still believe the spectrum acquisition will be approved. "We still expect the transaction to go through," says Schildkraut. He stresses that while the spectrum purchases and commercial arrangements with cable companies were announced on the same day, they are two separate agreements that won't be conflated in a regulatory review. "The spectrum sale on its own is more difficult," says Schildkraut, but he notes that if a regulator were to block Verizon's service boosting acquisition, it could signal that authorities are "picking winners and losers" with antitrust suits. That's because Verizon lags its competitors and industry leader T-Mobile in its spectrum per user, even if it has the largest customer base, according to Schildkraut. Verizon shares are off over 5% year to date to $37.95, while AT&T has posted marginal year-to-date losses. Both companies are underperforming the S&P 500 Index after outperforming the index in 2011.
For wireless giants, the big prize is 4G spectrum to bolster smartphone services, meanwhile cable companies are increasingly looking to add long-term wireless service into their retail offerings by negotiating reselling arrangements with wireless providers. Verizon's pick up eliminated one of the best looking options in both arenas. For Sprint and T-Mobile, the spectrum sold to Verizon was one of best ways for the industry's third and fourth largest carriers to catch the leaders. Meanwhile, the marketing partnership between Verizon Wireless, Comcast and Time Warner and a wireless reselling option in four years' time eliminates two large cable companies from market for wholesale resellers like Clearwire or potentially, Sprint and Dish. For more on Verizon see Bruce Berkowitz's Fairholme Capital Management portfolio, or 15 high yield momentum stocks.
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