Spectrum Swap in Sight at Nextel

Nextel (NXTL) shares rose Thursday as the wireless telco closed in on a favorable ruling from federal regulators.

The Federal Communications Commission has three of the five votes necessary to approve a plan that would give Nextel a new swath of radio frequency, according to a report in Thursday's Washington Post. The radio spectrum swap, in which Nextel would vacate airwaves used by emergency services in exhange for some high-priced real estate elsewhere, could set the telco up for a bit of a windfall.

The agreement would require Nextel to chip in as much as $2.35 billion toward the process. That's $1.5 billion more than the company proposed, according to the Post. The plan is due to come to a vote at the FCC's monthly meeting next Thursday.

Based on the reported cost to the company and the value of the new spectrum, Legg Mason analyst Craig Mallitz estimates that Nextel will get a net gain of $1.7 billion. Mallitz has a buy rating on Nextel, and his firm holds a small stake in the company.

"This would certainly give them a big win," says Mallitz. "I think payment terms and timing" is now the big issue, he says.

Auction Talk

The swap proposal has been the subject of heated debate in Washington and on Wall Street, as the FCC attempts to balance the interest of public safety with the value of scarce wireless spectrum central to the interests of a highly competitive industry.

For example, rivals like Verizon Wireless -- a joint venture of Verizon ( VZ) and Vodafone ( VOD) -- have argued that the chunk of 1.9ghz spectrum that Nextel could gain is worth $7.2 billion. They say the spectrum should be auctioned rather than given away. But industry observers question the validity of those politically charged estimates and the viability of an auction.

An FCC representative declined to comment on the status of the plan, but disputed the notion that Nextel would see a windfall from any agency decision. "There's simply no guarantee of how much the spectrum could be sold for," says FCC rep Lauren Patrich.

Wireless calling volumes are soaring as more than half the U.S. population now uses a cell phone. On top of that, mobile data traffic is starting to rocket as telcos offer faster Net connections for email, photo swapping and Web browsing. This has fueled greater demand for wireless spectrum, especially in the higher capacity frequencies like 1.9ghz.

But the growth of cell phone use has also further disrupted fire and police communications, which happen to share the 800mhz airwaves with commercial carriers. The FCC is under pressure to ensure public safety and faces few alternatives outside the Nextel swap proposal that meet that objective.

Red Tape

While an auction of the airwaves would represent the most equitable solution from an industry perspective, the proceeds would go to the U.S. Treasury. The problem with that approach is that it would require separate funding to pay for the relocation of nonemergency 800mhz license holders, and the FCC is required to find a solution that pays all the relocation costs.

So far, the Nextel swap proposal is the only plan that addresses the relocation expenses.

Nextel has proposed to pay $850 million to cover the cost of moving nonemergency occupants of the 800mhz band. A company representative would not comment on the prospect of the company having to contribute an additional $1.5 billion.

For Nextel, the swap would solve many of its network capacity constraints for years to come, but investors worry about the costs. Even though Nextel would get a clean new swath of spectrum for a good price, the company will have to raise a considerable amount of cash to pay for the deal, not to mention the expense of network upgrades and expansion.

Nextel shares were up 21 cents, or 1%, to $25.59 in midday trading Thursday.

More from Technology

Deconstructed: Why Micron's Stock Has Exploded 11% in 13 Hours

Deconstructed: Why Micron's Stock Has Exploded 11% in 13 Hours

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors

4 Billionaires Trying to Make Space Travel a Reality

4 Billionaires Trying to Make Space Travel a Reality

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament