The largest U.S. mobile services provider Verizon Communications (VZ) plans to buy radio-spectrum licenses from the privately held cable operator Cox Communications Inc. The deal is awaiting approval from the Federal Communications Commission.
Verizon is progressing fast to acquire more spectrum licenses in order to support its video content and other data services in the rapidly growing smartphone market. The demand for Apple Inc.’s (AAPL) iPhone 4 and 4S is also gaining traction.
We believe the purchase of new spectrum will boost Verizon’s capacity to offer services at a much higher speed, thereby driving data revenues. Verizon would acquire the 20 MHz Advanced Wireless Service (AWS) licenses covering 28 million Americans in cities including Boston, New Orleans, Jacksonville, Florida, Phoenix, San Diego and Las Vegas for $315 million.
Verizon and Cox would be able to market and sell each other’s residential and commercial products and services, thereby solidifying their respective competitive positions in the telecom sector.
The transaction is similar to the agreement Verizon announced earlier in the month. The company agreed to purchase wireless spectrum from a group of cable companies, including Comcast (CMCSA), Time Warner Cable (TWC) and Bright House Networks. The deal would entail Verizon to acquire 122 radio (or AWS) spectrum licenses covering 259 million Americans for $3.6 billion.
This shows Verizon’s keenness to acquire new spectrum to strengthen its competitive position against Sprint Nextel Corp. (S), which is a turnaround story, and AT&T Inc. (T), which is already battling its proposed T-Mobile merger. The purchase of excess airwaves might force AT&T to seal its ambitious takeover of T-Mobile.
We believe the spectrum deals would be accretive to Verizon in the long term. But it might pressure the balance sheet in the short term by reducing cash balances and increasing capital expenditures.
Last month, Cox announced it would not sell its wireless service effective April 2012. Hence, the transaction will benefit its customers and enhance its mobility, particularly in accessing Verizon Wireless 4G LTE network and wireless devices. Cox could use its own brand name to sell Verizon’s products.
We are maintaining our long-term Neutral recommendation on Verizon. The stock retains a Zacks #3(Hold) Rank for the short term (1–3 months).
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