<Also confusing is the discussion of new spectrum at 700.>
Spectrum Straits? Not for Nextel, Which Isn't in Dire Need in Coming Auction
By Carolyn Koo
Staff Reporter
12/11/00 6:13 PM ET
Nextel Communications (NXTL:Nasdaq - news) desperately needs the spectrum the Federal Communications Commission will auction off Tuesday.
Or so some investors believe.
Actually, the company, the nation's fifth-largest provider of wireless services, enters the bidding with enough spectrum for current needs, and perhaps better opportunities down the road to pick up spectrum for upgrading to next-generation networks. So if its bids fail, investors need not despair.
The FCC will auction 422 licenses in the 1900 megahertz band of spectrum. Because of the large number of licenses, the auction likely won't finish until mid-January. Frank Marsala, an analyst at ING Barings, estimates that wireless companies could bid $10 billion to $15 billion in total, a sizeable amount but less than similar auctions in Europe. Marsala figures prices will remain relatively reasonable here because a number of companies have managed to get more spectrum via swaps or acquisitions.
Spectrum is the range of electromagnetic frequencies used in the transmission of voice, data and video. Only a fixed amount is available, which makes spectrum a coveted commodity. The more spectrum a carrier has licenses for, the more services it can offer, especially as data traffic increases with the development of third-generation networks. Megahertz is a measure of bandwidth, or the width of a communications channel.
Differences
Spectrum is as valuable to Nextel as to its competitors, but the Reston, Va.-based company has key differences from its competitors. All of its spectrum resides in the 800 megahertz and 900 megahertz SMR (specialized mobile radio) bands, a legacy from its origins as a two-way radio dispatch company. On those bands now, Nextel operates a digital two-way radio service as well as an all-digital cellular service, serving 6.2 million subscribers. A rival like No. 1 Verizon Wireless possesses spectrum in a variety of bands, including the 1900 megahertz band, used for PCS (personal communication services).
Nextel has an average of 15 megahertz to 18 megahertz of spectrum in the major markets. Meanwhile, the top carriers typically have 25 megahertz to 30 megahertz in each.
"It's perceived by investors to need more spectrum, but for Nextel's existing business it's not much of an issue," says Peter Friedland, an analyst with W.R. Hambrecht "It has a niche strategy with its dual-function phone and doesn't have to add the same amount of customers [as its competitors]." (He rates Nextel a buy, and his firm hasn't done underwriting for the company.)
The spectrum is, however, necessary to shore up the company's strategy for the future. "Nextel needs a high-speed wireless data strategy and doesn't have substantial spectrum to launch one today," Friedland says.
Big Money
Acquiring that spectrum could get very expensive. Nextel has put up $151 million in upfront fees for the auction, while ConnectBid, which has an agreement with Nextel to bid for the licenses restricted to smaller companies, has put up $88 million. That's enough to bid on all open licenses. (Craig McCaw, the billionaire telecommunications pioneer, owns 49.9% of ConnectBid through his Eagle River Investments. The McCaw family made its first investment in Nextel in 1995 and now holds 16% of the company, along with two board seats.)
But analysts explain that Nextel won't pay up for spectrum, even if third-generation, or 3G, networks are at stake.
"Nextel will be a heavy bidder, but it is only willing to pay if it can gain substantial chunks of spectrum," Friedland says. "If it can get a 10 megahertz to 20 megahertz piece covering 60% of the U.S., it will pay up."
However, Marsala thinks it'll be hard for Nextel to get that much in one go. "Nextel may not come away with much, as it will be difficult to acquire large blocks of contiguous spectrum in this auction," he explains. (He rates Nextel a strong buy and his firm hasn't done underwriting for the company.)
Holding Cash
If that's the case, it's to Nextel's advantage to preserve its cash for the possible auction in March of spectrum in the 700 megahertz band or the 3G auction in late 2002.
"If there's a 700 megahertz auction in March, these guys [Verizon and AT&T Wireless (AWE:NYSE - news)] will probably already have written some big checks. They'll have less interest in March," Marsala notes. "Nextel sits in a good spot. What are the chances that Verizon and Cingular Wireless will lay out all this money and then do the same thing a few weeks later?" Cingular , the second-largest U.S. wireless carrier, is a joint venture between SBC Communications (SBC:NYSE - news) and BellSouth (BLS:NYSE - news).
Plus, the company received a boon last month when the FCC allowed Nextel to buy up to 5 megahertz more of spectrum per market in the 800 megahertz band, and left the door open for the company to buy an additional 5 megahertz of spectrum per market in the 900 megahertz band.
Buying that spectrum will cost the company "peanuts," Marsala says, and will bring it close to the critical number of 25 megahertz of spectrum in each market.
Says Friedland, "This auction [on Dec. 12] is not the end-all and be-all for Nextel." |
