Fresh off the government’s decision to release all participants from the financial responsibility related to the ill-fated auction of NextWave Telecom Inc.’s wireless spectrum, Verizon Wireless Inc. purchased 50 wireless licenses from Long Island, N.Y.-based Northcoast Communications L.L.C.
The $750 million cash deal, which is expected to close during the second quarter of 2003, includes 10 megahertz personal communications services licenses covering more than 47 million potential customers in the Midwest and East in a number of top 20 U.S. markets including New York, Boston and Minneapolis. In addition, Verizon Wireless said it acquired more than 300 cell site locations in the deal.
“Radio spectrum is the lifeblood of our industry,” said Denny Strigl, president and chief executive officer of Verizon Wireless. “With additional spectrum we can continue to provide high-quality service even as we develop and deploy new services that our customers require. … This spectrum comes at the right time and in the right places.”
The price is also somewhat of a bargain since Verizon Wireless bid more than $2 billion for just a single 10 megahertz license in New York during the doomed NextWave re-auction. The carrier said it would fund the acquisition by drawing from an existing inter-company loan facility with parent company Verizon Communications Inc. and that it has already factored the network investments into its near-term capital program.
“I think this deal will definitely help Verizon,” said Tole Hart, senior wireless analyst at Gartner Research. “They have been looking for ways to acquire additional spectrum in markets like New York, and it looks like they are getting it for a deep discount relative to the NextWave auction.”
Northcoast, which is owned by New York-based Cablevision Systems Corp., said the deal reflects its parent company’s ongoing efforts to maximize value of its non-core assets. In addition to broadband, cable, Internet and telephone holdings, Cablevision also owns Rainbow Media Holdings, Madison Square Garden and the sports teams that play there, and operates New York’s Radio City Music Hall.
“Located in a number of very attractive markets, we knew these licenses were valuable assets when we purchased them and believe that Verizon Wireless is uniquely qualified to realize the benefits of this important capacity,” said John Dolan president and CEO of Cablevision.
Northcoast is expected to use approximately $60 million from the deal to retire Federal Communications Commission-related debt with the balance of the proceeds being distributed to its partners. Cablevision said it will use its $635 million share of the sale to pay down bank debt.
“Northcoast Communications has proven to be an excellent investment for Cablevision,” Dolan said.
Northcoast will still control a handful of wireless licenses and is expected to continue to operate its fixed price, unlimited local calling service in its Cleveland market.
Analysts have long suspected Verizon Wireless was seriously looking at acquiring at least a portion of Northcoast’s spectrum portfolio. That suspicion was bolstered by Northcoast’s planned use of CDMA technology in its limited launches and the almost inviting way it was slowly rolling out services ahead of FCC-mandated build out dates for PCS licenses.
Cablevision also announced in August that it was looking at possibly selling off some of Northcoast’s wireless licenses in an attempt to generate revenue.
“This deal has always made sense, but I think Verizon was looking for the financial relief from the NextWave auction before pulling the trigger,” said Adam Guy, director of wireless research at InfoTek Research.
Verizon Wireless has been aggressive in the past in acquiring both spectrum and installed networks having recently purchased Shenandoah Telecommunications Co.’s cellular business, wireless licenses from Dobson Communications Corp. and Price Communications Corp.’s wireless network.
But, unlike the previous acquisitions that involved mostly rural markets designed to fill in its network, most of the Northcoast licenses are in markets where Verizon Wireless already offers service but is in need of spectrum capacity to continue to support its growing customer base. In all of the top 50 markets involved in the deal, Verizon Wireless only held 25 megahertz of cellular spectrum, according to the RCR Wireless News Database.
The deal also puts more pressure on Verizon Wireless’ competitors and in particular on Cingular Wireless L.L.C., which lacks the spectrum footprint of the other nationwide operators. With most of Northcoast’s spectrum now in the hands of Verizon Wireless, Cingular may have to look more closely at trying to acquire spectrum from financially troubled carriers like Leap Wireless International Inc., Qwest Communications International Inc. or even NextWave if the courts side in its favor.
Gartner’s Hart pointed out that one benefit to the industry of the Verizon Wireless deal is that the carrier might not be as aggressive in a future FCC auction, which could lead to lower bid prices than what was seen during Auction 35 when Verizon Wireless accounted for more than half of the nearly $17 billion bid during the auction.
