The largest U.S. mobile service provider Verizon Communications (VZ) has entered into a deal to swap its wireless airwaves with the low-cost wireless service provider Leap Wireless (LEAP).
Verizon is moving quickly to acquire more spectrum licenses to support its video content and other data services in its 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 boosting data revenues. The swap deal would enable Verzion to acquire 23 PCS licenses and 13 Advanced Wireless Service (AWS) licenses across the U.S. for $204 million.
The swap deal comes within a week of the announcement that Verizon will buy wireless spectrum from a group of cable companies, including Comcast (CMCSA), Time Warner Cable (TWC) and Bright House Networks. In this deal, Verizon will acquire 122 radio (or AWS) spectrum licenses covering 259 million Americans for $3.6 billion.
This shows Verzion’s keenness to acquire new spectrums to strengthen its competitive position against its major rivals Sprint Nextel Corp. (S), which is a turnaround story, and AT&T Inc. (T), which is already battling with 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 put pressure on the balance sheet in the short term by reducing cash balances and increasing capital expenditures.
Coming to Leap Wireless, it will purchase 12 MHz of 700 MHz A-block spectrum in Chicago from Verzion for $204 million. The swap deal would boost its spectrum position in Chicago and support the deployment of the Long Term Evolution (LTE) network technology. Leap Wireless is on track to launch a trial run for its 4G LTE network in Tucson, Arizona by this year-end and targets to expand its coverage to two-thirds of the current footprint over the next two to three years.
Additionally, Leap‘s majority-owned venture, Savary Island Wireless would sell Advanced Wireless Service worth $172 million to Verzion.
The swap deal is waiting approval from the Federal Communications Commission.
We are maintaining our long-term Neutral recommendation on Verizon. The stock retains the Zacks #3 Rank (Hold) for the short term (1–3 months).
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