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Wireless infrastructure CEO expects 5G capex deferment after huge C-band spend

➤ Verizon is likely the biggest winner in the FCC's C-band auction.

➤ If Verizon paid exorbitant amounts for the spectrum, T-Mobile's acquisition of spectrum in Sprint deal is "a stroke of genius."

➤ Auction results could impact operators' budgets for network build-outs in 2021.

Alex Gellman, CEO and cofounder of Vertical Bridge REIT LLC, a private owner and operator of wireless communications infrastructure, recently spoke to S&P Global Market Intelligence about what he expects to see in the Federal Communications Commission's C-band auction results. Below is an edited transcript of the interview.

S&P Global Market Intelligence: While we do not know the auction results yet, who do you think will walk away with the most spectrum and what does it means for them going forward?

SNL Image

Vertical Bridge CEO Alex Gellman
Source: Vertical Bridge

Alex Gellman: I think Verizon [Communications Inc.] will be the biggest winner, because they've needed the mid-band spectrum for a while. I think AT&T [Inc.] will have played strongly as well, [spending] much bigger dollars than they thought they would. And then I think T-Mo[bile US Inc.] may be the surprise. You may see T-Mo having gone a little stronger than was expected to begin with. And then I guess the real wild card will be DISH [Network Corp.]

Gross proceeds were over $80 billion. Did you get the sense that wireless operators overpaid? And did they need to do this because they needed the spectrum to be competitive with 5G offerings?

I think there's a few reasons tied up and they're a little bit different for each company. First, I think that this is the last big chunk of mid-band spectrum that's easily visible. So it may be the last one coming for a while. This has become beachfront real estate for broadband. As you look into 5G and beyond, it's getting harder and harder to see big clear blocks of spectrum that the FCC can find. It just was a very important block of spectrum, without the prospects of a lot more out there in the immediate future, or even midterm future.

Second, I think that implicit in this is that millimeter wave spectrum has its challenges and that it doesn't propagate very far. And I think this is a tacit acknowledgment that this mid-band spectrum is better.

I think third, T-Mobile getting Sprint really put pressure on [other operators], because T-Mobile got some prime 2.5 [GHz] spectrum, big blocks of it, that they're now deploying, which will give them an inherent advantage without a counter move by AT&T and Verizon. So that's what's driving all of this.

There was some speculation before the auction that AT&T would sell DIRECTV to pay for its participation in the C-band auction. Instead, it got a $14.7B loan. How much of the spending by Verizon and AT&T do you think will need to be funded by new debt?

The honest answer is I don't really know. I wouldn't assume that AT&T is not going to sell DIRECTV — I just think they set themselves a tall order. I'm going to now label DIRECTV as the Carson Wentz asset of AT&T's portfolio. Let's see what moves first: Carson Wentz or DIRECTV. As I understand it, what they've been trying to do with DIRECTV is thread the needle, where they can continue to consolidate it onto their income statement and therefore it won't affect their leverage and ratios, but still sell a big chunk of it so they can get cash. And I'm not sure who's willing to do that. I think Verizon's leverage will go up a little bit, but my understanding is it won't be a sea change. I think AT&T's got a little tougher needle to thread here with their existing leverage levels. These companies are gigantic, so $25 billion or $40 billion sounds like a ton to us. It's actually, in context, more manageable for them.

Editor's Note: In June 2019, the Philadelphia Eagles signed a four-year $128 million contract extension with quarterback Carson Wentz. By December 2020, Wentz had been benched. Now, the Eagles are reportedly pursuing a trade.

What does the auction outcome mean for Vertical Bridge?

I don't think it can have any effect other than a deferral of capital expenditures for a period of time. You can't just simply say, "Oh, instead of $40 billion, it's $80 billion" and not have that affect short term investment in deployment. I think that it means specifically 2021 is going to be a pretty weak year for carrier capital spend, which is what drives demand for tower space. And I wouldn't be surprised if 2022 is weak as well, simply because it's a lot of money to soak up. In context, the capex budget for AT&T, Verizon and T-Mobile combined is about $40 billion a year. So it's two years of their budgets.

I also think there are two other factors at play that we should keep an eye on. One is corporate taxes. Any of these companies are taxpayers — if their corporate tax goes up, that takes money right out of free cash flow, which I believe would directly impact their capex budget. And then two, a little more nebulous, but net neutrality. When net neutrality was a policy of the Obama administration, AT&T, for example, was very, very vocal about not investing in their network in the U.S. — and they didn't. And if the issue resurfaces under the new administration, that could also dampen capex investment plans by the carriers.

If Verizon ended up paying what we think it ended up paying, do you think it's fair to say T-Mobile is the true winner of the auction because they were able to get so much mid-band spectrum as part of the Sprint deal?

Yes, I think it makes the Sprint deal look like a stroke of genius.

Turning to cable, to what extent do you think cable operators participated in the auction and what does it say about the future of mobile offerings from cable operators?

I think cable has a problem. I think that wireless access to the home is more efficient. It's more robust. It's a better economic model to the extent that there's capacity in 5G networks in the suburbs and it lets homes be reached directly by the existing wireless network. Cord cutting will just continue. The more efficient wireless gets, the more ubiquitous it gets, the more capacity it has — it's a better business model for everything else. So as long as it can meet the minimum consumer set of requirements, it's going to win, and I think that the cable companies know that. They're hedging their bets. You saw Charter [Communications Inc.] and Comcast [Corp.] participate in the CBRS auction, very interestingly with roughly the same amount invested. It will be interesting to see if that ratio holds in C-band. But I think there's a real threat to them that will continue to emerge.

Does the pandemic slow the move to wireless from fixed given the remote work situation we're all in?

I think that we're all more reliant on broadband. What I would say is fundamentally, a wireless network is better able to adapt quicker to changes. I can tell you where I live the quality of my service from my provider has not been great. Maybe it's because I'm home more, but the outages are astounding to me. Whereas, my LTE works. It's the same every day. I think it's highly dependent on where you live and who your provider is and how much that provider is investing in their core network.