ROOFTOPS 2001

Verizon's Bid to Go Across the Spectrum

Having postponed plans for an IPO earlier this year, Verizon Wireless has had to come up with other means to fund its spectrum acquisitions, both here and abroad. For the ongoing U.S. auction, the company has benefited from the generosity of wealthy parents Vodafone and Verizon Communications .

Indeed, Mom and Dad seem to have forked over plenty of money. Verizon Wireless has handily outbid all other carriers, plunking down more than $5.5 billion for 46 licenses - more than half of the total auction proceeds to date. The company currently holds top bids in the desirable markets of New York City, Chicago, Boston and Washington, D.C.

Most of the major wireless carriers have teamed up with smaller "bidding partners" for this auction to get around the Federal
Communication Commission's efforts to set aside some spectrum for smaller companies. (The rules prohibit the major carriers from "directly controlling" these frequencies.)

In the race for licenses, which resumes this Friday after a holiday break, AT&T Wireless and affiliate Alaska Native Wireless are in second place. The partnership has bid more than $2 billion for 106 licenses. The new U.S. wireless venture Cingular, formed by the merger of Bell South Mobility and SBC Wireless, is running third as its bidding partner, Salmon PCS, has put up more than $1.5 billion for 62 licenses. Verizon Wireless is also using a bidding partner, called the Cellco Partnership.

The auction promises to be the most profitable U.S. spectrum deal to date, and it has already surpassed the previous record of $9.2 billion, which was bid for PCS licenses in 1996. Of the 87 companies that started bidding, only 58 remain, with recent exits by Alltel Communications, Sprint PCS-affiliate Alamosa PCS Holdings and Nextel.

Winners will receive a plum privilege - the right to deploy new services and improve coverage for mobile devices, especially in dense urban areas. Specifically, companies are bidding for 422 C- and F-Block PCS licenses in the 1.9-GHz range, many of which previously belonged to NextWave Communications. The reassignment of the NextWave spectrum has been especially contentious, as NextWave couldn't pay for the licenses but has raised many legal challenges to the FCC's right to strip them away.

It's far too early to predict winners and losers, but some images are beginning to take shape. Nextel was expected to gain some licenses in this auction but has changed its strategy in the face of skyrocketing spectrum costs - apparently, to the satisfaction of its investors. The company's stock had dropped 31 percent since the auction began, though it rose 5 percent last Thursday, after the company pulled the plug on its participation. (Noting Nextel's low profile in the early bidding, WR Hambrecht reiterated its "buy" on the company and issued a positive report that claimed, "Nextel's apparent decision to preserve its current $6 billion cash balance makes a lot of sense, particularly in light of the difficult capital raising environment.")

The auction is expected to last another couple of weeks, possibly bringing in as much as $20 billion when all is said and done. As the bidding continues to escalate, expect questions of how much wireless carriers can pay without adversely affecting their financial stability (and user rates) to get louder and more frequent. Of course, you can also look for questions, aimed at Verizon and others, regarding the licenses' high cost, especially given the well-documented splurge in the U.K. and Germany last spring. James Earl Jones, after all, doesn't come cheap.