Verizon (NYSE:VZ) announced a $3.6 billion deal Friday that would help it buy a significant chunk of wireless spectrum from SpectrumCo, a joint venture formed by Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWC) and Bright House Networks.  The deal will give Verizon control of 122 advanced wireless services (AWS) spectrum licenses helping it reach around 259 million potential customers, or 83% of the U.S. population in other words.  Verizon said that it will use the spectrum to build out its rapidly growing LTE network where it already has a significant head start over its smaller national carriers AT&T(NYSE:T) and Sprint (NYSE:S).
Commemorating the first anniversary of the launch of its LTE network Monday, Verizon further bolstered its spectrum position by buying AWS spectrum licenses from Leap Wireless in various markets for around $188 million. Under the deal, Leap will also be purchasing spectrum from Verizon in the Chicago market for $204 million, which means Verizon will in fact gain $16 million after the spectrum swap deal. 
Our price estimate for Verizon’s stock is $43.50, which is about 15% above market price.
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Huge win for Verizon
Verizon is competing in a mostly saturated market where subscribers are few, but wireless connections many. A recent report by wireless trade body CTIA reveals that the number of wireless subscriber connections (327.6 million) has surpassed the population (315.5 million) in the United States.  In such a marketplace, it becomes imperative for carriers to improve their services to lure customers away from their competitors; services which depend on wireless spectrum available to support higher speeds while keeping networks congestion-free. AT&T’s desperation to secure its T-Mobile purchase exemplifies the dire need for spectrum that wireless carriers face and if its deal receives regulatory approval, Verizon will have scored a huge win by taking a huge chunk of unused spectrum off the table for its rivals.
The deal will help Verizon maintain its huge lead over AT&T, Sprint and other smaller players in the race for LTE network rollout. LTE, or long-term evolution, is a 4G wireless technology that improves upon the current data speeds by lowering latency and increasing throughput. As consumers flock to new mobile devices such as smartphones and tablets, the demand for higher data speeds on mobile networks is on the rise. Increasing its LTE coverage for consumers will help Verizon address this need and grow market share at the expense of slow movers starved of spectrum to put their plans to action.
ARPU levels should rise
Also, the data plans that smartphone users typically subscribe to are postpaid plans, the margins on which are huge. Postpaid customers generally bring in more revenues per user compared to prepaid customers, which is why carriers subsidize smartphones in return for long-term contracts. Increasing smartphone usage, driven by higher data speeds on its LTE network, will therefore increase Verizon’s ARPU levels in coming years.Notes:
- Comcast, Time Warner Cable, and Bright House Networks Sell Advanced Wireless Spectrum to Verizon Wireless for $3.6 Billion, Company Press Release, December 2nd, 2011 [↩]
- U.S. Population Statistics, U.S. Census Bureau [↩]
- Leap Agrees To Sell Spectrum to Verizon Wireless, WSJ, December 5th, 2011 [↩]
- CTIA Semi-Annual Survey Reveals Historical Wireless trend, October 11th, 2011 [↩]