(VZ) Verizon and U.S. Cellular to Swap Spectrum

The largest U.S. mobile service provider, Verizon Communications (VZ) is seeking approval from the Federal Communications Commission for the planned spectrum swap with U.S. Cellular (USM).

Verizon remains the leading provider of wireless voice and data communication services in the U.S. as it continues to expand both its 3G and 4G Long-Term Evolution (LTE) mobile broadband networks.

We believe Verizon and its largest competitor AT&T Inc. (T) has the lowest spectrum holding per subscriber in the industry due to growing data usage, which has put pressure on their networks. To overcome this issue, AT&T is in the process of several regulatory actions to acquire T-Mobile. Verizon is also trying to provide superior services to maintain an edge over its smaller rivals such as Sprint Nextel Corp. (S) and U.S. Cellular.

Under the swap deal, Verizon will receive two 10MHz PCS licenses in Illinois and Indiana. In exchange, it will offer U.S. Cellular 13 lower 700 MHz B-Block licenses and five lower 700 MHz C-Block licenses in Idaho, Illinois, Indiana, Kansas, Nebraska, Oklahoma, Oregon and Washington.

We believe both Verizon and U.S. Cellular will benefit from the swap deal. The PCS spectrum will allow Verizon Wireless to expand its capacity and improve its services in the major markets.

On the other hand, U.S. Cellular will benefit from the 700MHz spectrum that would upgrade its network capacity, and voice and data services in its existing markets. The spectrum will further aid in deploying LTE networks in 24 markets by the end of November, covering approximately 25% to 30% of its total subscriber base. Verizon is currently working with rural companies to collaboratively build and operate a 4G network in those areas, using Verizon Wireless’ 700MHz spectrum.

We are maintaining our long-term Neutral recommendation on Verizon and U.S. Cellular. The stocks retain the Zacks #3 (Hold) Rank for the short term.

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