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End in sight for spectrum auction, all eyes turn to M&A

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End in sight for spectrum auction, all eyes turn to M&A

The broadcast incentive auction will not go down in history as the spectrum extravaganza FCC Chairman Tom Wheeler once promised. But nor will it go down as a complete failure.

The FCC said Jan. 18 that based on the forward auction bids received that day, the requirements of the incentive auction's Final Stage Rule had been satisfied. While the auction is not yet over and will not be fully concluded for some time, the satisfaction of the Final Stage Rule means the auction will successfully end in Stage 4.

That means participating broadcasters will receive $10.05 billion for their spectrum licenses.

The Final Stage Rule had two components: first, the average price per MHz­-pop for the top 40 markets — or partial economic areas — had to reach at least $1.25 per MHz-­pop; second, the forward-auction bid prices had to meet or exceed the clearing cost, or the amount needed to buy stations' spectrum, plus $1.75 billion in repacking expenses the FCC has budgeted.

"Reaching the Final Stage Rule means the benefits of the auction are indisputable," Wheeler said in a Jan. 18 statement. "We will repurpose 70 MHz of high-value, completely clear low-band spectrum for mobile broadband on a nationwide basis. On top of that, 14 MHz of new unlicensed spectrum … will be available for consumer devices and new services."

BTIG LLC analyst Walter Piecyk noted in a recent blog post that at $10.05 billion, the spectrum clearing cost came in "well below expectations" and "is not welcome news for broadcasters hoping to monetize spectrum."

A Washington FCC watcher expressed frustration with the figure, saying, "It's shocking that wireless carriers promoted the idea of a spectrum crisis for years, but refused to put their money where their mouth was when airwaves became available."

But PwC Strategy& Principal Dan Hays said the auction should not be cast in too negative a light.

"For many, this auction will be remembered as a breakthrough. As an incentive auction, it was truly the first of its kind," Hays said in an interview. Still, he also acknowledged, "Financially it may not be thought of quite as fondly, with overall proceeds and volume both falling short of most expectations."

The $10.05 billion clearing costs may seem especially surprising given the 75% drop seen between Stage 3, which ended with a $40.31 billion clearing cost, and Stage 4.

"The primary reason for the 75% drop in the reverse auction was the 24 MHz reduction in spectrum that the FCC was buying," Piecyk said, noting that while Stage 3 had a clearing target of 108 MHz, the Stage 4 clearing target was 84 MHz.

"Reducing the spectrum purchase in each market by that much likely cleared out station owners holding out for higher prices," Piecyk said, saying that the overall effect was a "double whammy" for broadcasters.

In a statement, National Association of Broadcasters spokesman Dennis Wharton did not comment on the size of the Stage 4 clearing cost. Instead, he said the association "looks forward to the close of the incentive auction, and to working with the FCC and Congress to develop a repacking plan and transition schedule that protects viewers and avoids service disruptions."

Wireless operators are set to continue bidding in the forward portion of Stage 4 until there is no excess demand in any market. After that, the commission will conduct an assignment phase where winning wireless bidders may bid for specific blocks.

Notably, because of the design of the auction, even if subsequent bidding rounds push forward auction prices up, it will not change the $10.05 billion total broadcasters are set to receive. The majority of the spread between what the FCC needs to pay out to broadcasters, including repacking costs, and what will be coming in from the forward auction is expected to go to the U.S. Treasury's general fund to pay down the national deficit.

As of the close of bidding on Jan. 19, forward auction proceeds totaled $18.30 billion, with the next round of bidding set to begin on Jan. 23.

In terms of a possible timeline, Piecyk believes the assignment phase could end by mid-February and the winners of the auction could be announced by March 1. That would mean the anti-collusion period — which prohibits all auction applicants from "cooperating or collaborating" with respect to their auction strategies or from "discussing or negotiating settlement agreements" could end by mid-March.

"This will likely be welcome news to restricted companies anxious to engage in strategic discussion," Piecyk wrote.

SNL Kagan analyst Sharon Armbrust agreed, saying in an interview, "All eyes are forward."

Among the major bidders believed to be participating in the auction — including T-Mobile US Inc., AT&T Inc., Verizon Communications Inc. and Comcast Corp. — Armbrust said there is a general feeling of, "Let's get beyond this to start talking and making deals and partnerships."

In part, this is because the anti-collusion period for forward auction applicants has been in effect for almost a year at this point.

"Virtually no one expected that the auction would last more than a year from the time that the prohibited communications period went into effect," Hays said.

But Armbrust noted that it also has to do with the expectation that the upcoming Republican administration under President-elect Donald Trump will be "much more friendly to M&A."

"I think everyone's excited about that," she said.

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