Sprint Nextel Corp. (S:US) Chief Executive Officer Dan Hesse said he’s on a hunt for wireless spectrum after watching Verizon Wireless and AT&T Inc. devour more and more of the mobile-phone industry’s most precious resource.
Sprint, the third-largest U.S. wireless carrier, needs to add capacity to keep its data service from buckling in the future as more users watch sports and music videos on phones and tablets. The company is looking for deals with other companies or through government sales, Hesse said in an interview.
A cash infusion is helping Hesse get more aggressive. In the two months after Softbank Corp.’s October agreement to spend $20 billion to take over Sprint, Hesse’s company agreed to $2.6 billion in purchases, mostly in an attempt to seize control of Clearwire Corp. In the previous 12 months, Sprint had spent almost nothing, standing by as its two biggest competitors cobbled together more than $5 billion in purchases.
“Clearwire would give us a strong spectrum position for a period of time,” Hesse said in an interview this month. “But we also have a very long-term view, and we would want to acquire more spectrum.”
Sprint’s options may include buying more capacity from smaller carriers such as U.S. Cellular Corp. or Leap Wireless International Inc. (LEAP:US) or buying them outright, said Phil Marshall, chief research officer at Tolaga Research. A deal with Hesse’s regulatory nemesis, Dish Network Corp. Chairman Charlie Ergen, is also a possibility, Marshall said. Or Sprint could acquire licenses in government auctions.
While radio waves are all around us, they’re not abundant enough for mobile-phone companies. The U.S. government treats airwaves as a public good, dividing them up and selling licenses to companies, including wireless carriers, to use for their communications. Those licenses are becoming tougher to find, and more expensive, as the Federal Communications Commission runs low on new frequencies it can offer for sale.
Extra spectrum would help fill out gaps in Sprint’s coverage, and the acquisitions could add more users, helping the company increase revenue and scale.
Hesse’s appetite for acquisitions depends on his ability to close the deal with Softbank. As part of the October takeover agreement, the Tokyo-based company said it would supply Sprint with $8 billion in capital so it could begin making purchases and investments. The deal is under regulatory review.
Sprint has lots of work to do if it aims to catch up to Verizon and AT&T in capacity. Verizon Wireless acquired $3.9 billion in airwaves from cable companies led by Comcast Corp. and Time Warner Cable Inc. And AT&T, in an effort to make up for lost ground during its failed takeover of T-Mobile USA Inc., said last month that it had signed 50 spectrum deals in the past year, including a $600 million purchase of NextWave Wireless and a $1.9 billion agreement to buy spectrum from Verizon Wireless itself.
“Spectrum availability is a core competitive weapon in a mini arms race,” said Craig Wigginton, head of telecommunications strategy at Deloitte & Touche LLP in New York.
With more people using smartphones and tablets, traffic on wireless networks is increasing. In the fourth quarter, smartphones accounted for 77 percent of Sprint’s retail phone sales, the company said during its fourth-quarter earnings call.
Total worldwide mobile traffic will increase 13-fold through 2017 at a compound annual rate of 66 percent, according to a report this month from Cisco Systems Inc.
Sprint began making moves in November, with a $480 million deal to gain network capacity and customers in Chicago and St. Louis from U.S. Cellular. In December, with Softbank’s urging, Sprint agreed to buy all of Clearwire, its national wireless broadband joint-venture partner, for $2.97 a share. While that acquisition would help replenish Sprint’s spectrum needs, the company will require more in the future, Hesse said.
“Given the increases in data usage we are seeing, we will continue to be interested in spectrum as it comes to market,” Hesse said in the interview. “It could be more deals like spectrum from other companies like we did with U.S. Cellular or it could be FCC auctions.”
Dish, co-founded by billionaire Ergen, has made a counterbid to Clearwire of $3.30 a share, an offer that is complicated because Sprint is Clearwire’s majority owner. Sprint, which has wrangled with Dish over regulatory approval for airwaves Ergen’s satellite-TV company owns, called Dish’s bid “illusory.’’
Sprint slid 1.9 percent to $5.79 at the close in New York, while Clearwire fell 1 percent to $3.12, a price that indicates shareholders expect to get more than Sprint’s current bid. Dish dropped less than 1 percent to $36.03.
Even so, Sprint could end up acquiring spectrum from Englewood, Colorado-based Dish if the satellite-TV company doesn’t find a partner for a mobile-phone service and decides to sell its airwaves. Such purchases of unused spectrum, in the so- called secondary market, are a possibility, Marshall said.
Acquiring entire companies would help Sprint expand its customer base in addition to getting more airwaves. U.S. Cellular (USM:US), based in Chicago, has 5.8 million customers and had $4.4 billion in revenue in the 12 months through last September.
“Sprint could use a better presence in the Midwest market,” Ron Westfall, research director for service provider infrastructure for Current Analysis, said in an interview.
Leap could be in play as well, said George Ford, a former FCC economist who is now chief economist at Phoenix Center, a public-policy research group in Washington. Leap serves 5.6 million customers, offering no-contract mobile-phone plans.
“This year, Leap and U.S. Cellular and the smaller regional carriers are the only potential targets in the market,” said Coleman Bazelon, a principal at consulting firm Brattle Group who specializes in phone and video regulation.
Greg Lund, a spokesman with Leap, declined to comment on takeover possibilities. Steve Carlson, a spokesman for U.S. Cellular, didn’t reply immediately to a request for comment.
Leap sank 8.3 percent to $5.61, while U.S. Cellular fell less than 1 percent to $38.68.
Two other competitors, T-Mobile USA and MetroPCS Communications Inc., are in the process of sealing their own merger, which must be approved by shareholders and regulators.
“If you look at the top four, Sprint and T-Mobile are the ones with the most need for spectrum,” said Marshall.
The FCC is also planning more spectrum license auctions, providing another opportunity for Sprint to gain capacity. There are potentially attractive airwaves next to some that Sprint already owns, Bazelon said.
U.S. Cellular has customers and spectrum in cities that would help bolster Sprint’s coverage. San Diego-based Leap has pay-as-you-go customers that could offer Sprint a revenue boost. Leap said in a November 7 earnings call that it has $3 billion worth of spectrum.
Last month, Shing Yin, an analyst with Guggenheim Securities, issued a report highlighting Leap’s potential attractiveness as a takeover. Left out of recent wireless consolidations and struggling to hang on to customers, Leap trades at about an 80 percent discount to U.S. Cellular.
The planned addition of Clearwire spectrum buys Sprint some time to complete the construction of a network using long-term evolution technology to offer faster speeds, said Kevin Smithen, a New York-based analyst for Macquarie Group Ltd. Eventually, it will need more capacity for growing demand, he said.
“Sprint’s focus this year will be on getting Clearwire done and building the LTE network,” said Smithen. “I think 2014 and 2015 are probably the big years for Sprint as far as spectrum deals.”
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