Barclays Equity Research analysts Amir Rozwadowski, Arindam Basu and Sandeep Gupta maintain Equal Weight ratings for T-Mobile US Inc (NYSE:TMUS) upon the announcement of the company acquiring 700MHz A-Block spectrum assets from Verizon Communications Inc. (NYSE:VZ).
Given recent improvements in usability, analysts consider the confirmed purchase of Verizon’s 700Mhz A-Block spectrum a strategic positive enabling T-Mobile US Inc (NYSE:TMUS) to improve its lower band/higher propagation spectrum portfolio as the asset gets built out. While the combination of future spectrum purchases (breadth and depth) and build requirements suggests an upward bias to capex and thus downward pressure to cash flow, management had already telegraphed its intention and thus the announcement is unlikely to derail current sentiment.
T-Mobile’s outlook
Moving forward with A-Block: T-Mobile US Inc (NYSE:TMUS) announced yesterday that it will be acquiring 700MHz A-Block spectrum assets from Verizon Communications Inc. (NYSE:VZ). Analysts believe the move is largely unsurprising given management has previously outlined its intention to acquire low band spectrum as the company builds out its LTE coverage. The total purchase consideration of ~$3.3B equates to $1.85/MHz-POP, which is broadly in line with expectations. The company will be using a substantial portion (almost two-thirds) of the $3.8B in equity and debt capital it had raised over the last quarter.
A-Block spectrum usage issues
Aggressive Build Timeline Expected: Including T-Mobile US Inc (NYSE:TMUS)’s existing A-Block spectrum in Boston, the company’s total A-Block assets will now cover 158M POPs extending in 9 of the top 10 markets. While most issues that had impaired the usability of A-Block spectrum have been resolved, potential interference with Channel 51 remains a concern. That said, more than 50% of licensed POPs acquired are not impacted by Channel 51 and management expects rapid deployment post deal closure in mid 2014. In addition, management expects compatible handsets to be available by 4Q14.
Upward Bias to Capex Expected: While management did not provide incremental color on outlook for capex, analysts note that it has laid out an aggressive build-out schedule post deal closure. Analysts believe this is likely to lead to an upward bias towards 2014 capex. Post the transaction T-Mobile US Inc (NYSE:TMUS) will have ~$3.8B of cash on the balance sheet which management has outlined may be employed for additional spectrum acquisition.
TMUS: Quarterly and Annual EPS (USD)
