Following a hastily retracted announcement earlier this month, Cingular Wireless L.L.C. officially announced last week it would purchase 34 PCS licenses covering 83 million potential customers from bankrupt license holder NextWave Telecom Inc. for $1.4 billion.
The official announcement, which was strangely similar to a prematurely released press statement sent Aug. 1, calls for Cingular to acquire 18 10-megahertz and a pair of 20-megahertz chunks of NextWave’s 30-megahertz C-Block licenses and 14 10-megahertz F-Block spectrum licenses.
The deal would leave Cingular with 40 megahertz of PCS spectrum in a number of California and Nevada markets, including Los Angeles, San Francisco, San Diego, Sacramento and Las Vegas, where it currently has a network-sharing agreement with T-Mobile USA Inc. In addition, Cingular would add 10 megahertz of PCS capacity to its current 25-megahertz cellular license in Chicago, Dallas, Houston, Washington, D.C., Boston, Atlanta and Baltimore and triple its Tampa PCS spectrum holdings from 10 megahertz to 30 megahertz.
While a majority of the licenses are in markets where Cingular already offers service, the carrier would gain spectrum in a handful of markets where it’s absent, including Portland, Ore., where its partner Salmon PCS L.L.C. controls 10 megahertz, and in Salt Lake City, where Cingular acquired 15 megahertz of PCS spectrum from Leap Wireless International Inc. in 2001 for $140 million.
Cingular said the acquisition was primarily for the future growth of the company and would provide the carrier with more room to provide additional services and products. A Cingular spokeswoman added that the new spectrum would not have any effect on the carrier’s plan to overlay its legacy TDMA technology with GSM technology, which is still scheduled to cover more than 90 percent of the carrier’s pops by the end of this year.
Following the announcement, Fitch Ratings affirmed its “A-” rating on Cingular’s senior unsecured long-term debt, noting because nearly all of the acquired licenses were in markets Cingular already serves, the carrier is not expected to experience significant capital expenditures associated with greenfield deployments.
Fitch added that Cingular is expected to finance the transaction through a combination of excess cash, short-term debt and a potential longer-term debt issuance. The carrier also is expected to receive additional backing from parent companies BellSouth Corp. and SBC Communications Inc., which have reduced the interest rate on Cingular’s $9.7 billion shareholder loans by 1.5 percent and extended the maturities from 2005 to 2008.
While some analysts were surprised Cingular didn’t acquire more spectrum in markets that currently prevented the carrier from providing its own nationwide footprint, others noted the deal shows that Cingular could be more interested in beefing up its current network coverage in preparation for the possibility of increased customer churn expected from the upcoming implementation of wireless local number portability later this year.
“They have seen the ghost of Christmas future and realize that network quality is going to be very important post-LNP,” said Adam Guy, senior wireless analyst at the Yankee Group.
Analysts added that they would not be surprised if Cingular announced additional deals with NextWave in the future to gain spectrum capacity in markets where the carrier is vacant today. NextWave’s 30-megahertz license in New York City could be particularly appealing to Cingular as the carrier now has to rely on its network-sharing agreement with T-Mobile USA to offer service in the nation’s largest market.
Other sources of spectrum could come from Qwest Communications International Inc., which announced last week it would transfer its entire customer base to Sprint PCS’ network and sell its wireless assets. Qwest’s spectrum could prove appealing to Cingular as Qwest controls a number of 10-megahertz spectrum licenses in markets absent from Cingular’s spectrum portfolio, including Denver, Minneapolis and Phoenix.
While most analysts expect the Cingular-NextWave deal to move ahead, terms of the sale released in a court filing show that lingering tension between NextWave and the Federal Communications Commission could complicate the deal and NextWave’s attempt to emerge from bankruptcy.
As part of the proposed NextWave/Cingular sale, the FCC will be paid $714 million unless a better and higher offer is found, and then the FCC could receive as much as $734 million. NextWave still owes the government at least $4.7 billion for the licenses it won at auction in 1997.
The “better and higher offer” is only one of several hurdles the NextWave/Cingular deal must clear before the deal is completed. The Department of Justice must approve the term sheet, which sets out the procedures for the FCC to be paid its cut of the sale of the licenses.
“We have no reason to believe that the Justice Department will reject the argument,” said Michael Wack, NextWave senior vice president and deputy general counsel.
The deadline for DOJ approval is later this month, and then presumably the proposed sale would be put out for auction. Bankruptcy procedures require that asset sales be put out for auction to ensure that the price paid by the buyer (Cingular) is the highest and best offer. This sale, according to the court filing, is to be completed by the end of September.
To participate in the auction, a prospective bidder must offer to buy the same licenses that Cingular is buying for at least $61 million more than the $1.4 billion Cingular is willing to pay. The $61 million would pay a break-up fee to Cingular and also ensure that the licenses were bought for more than $40 million than Cingular offered.
Once all of the prospective bidders have submitted bids along with 1.5- percent deposits, an open auction would be held in New York Sept. 23.
It would only be after the final sale was approved by Bankruptcy Judge Adlai S. Hardin Jr., expected to occur Sept. 25, that NextWave and Cingular would file license-transfer applications with the FCC.
The FCC has an incentive to review the applications as quickly as possible because beginning Feb. 28 there are various escape clauses from the agreement to ensure that the value of the spectrum does not change significantly enough to make it unprofitable for either NextWave or Cingular.
DOJ approval of the license-transfer is also necessary to ensure that the transfer complies with antitrust law. Since the FCC removed the spectrum cap, DOJ approval is the only explicit antitrust approval required.
