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Questions to ask before the incentive auction

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Questions to ask before the incentive auction

After yearsof waiting and watching, the clock phase of the FCC's reverse auction ofspectrum is set to begin at 10 a.m. ET on May 31.

As to what can be expected from the 600 MHz incentiveauction, some have viewed the FCC's initial spectrum of 126 MHz as a goodsign. SNL Kagan analyst Sharon Armbrust recently the target as a "candystore" for spectrum hungry wireless operators, echoing FCC Chairman TomWheeler's words that there would be "a significant chunk of spectrum"up for grabs.

Indeed, the 126 MHz target was higher than many industryobservers had expected. BTIG LLC analyst Walter Piecyk, for instance, noted inan April 29 blog post that he had expected a clearing target closer to 108 MHz.

Wheeler noted in an April 29 that the higher-than-expectedtarget reflected "the voluntary decision by many broadcasters that thisauction truly is a once-in-a-lifetime opportunity. The 126 MHz initial clearingtarget ensures that wireless carriers and other forward-auction bidders havetheir chance to compete for the maximum amount of lowband 'beachfront'spectrum."

He added that as the wireless industry prepares for the ageof 5G service, "the broadcasters have stepped up and done their part tofulfill that demand."

While this auction has literally been years in the making,allowing for careful and meticulous planning, there is still much that could goawry, however.

Here are some of the more pressing questions that stillremain in advance of the auction:

Will the auction be asuccess?

The most obvious — and perhaps most important — question is whetherwireless operators and other forward-auction bidders will be willing to pay theprices that broadcasters are asking. No one knows for sure just how muchbroadcasters are hoping to sell their spectrum for, nor is there any clear dataon how much the various forward-auction bidders are willing to pay.

While the clearing target was higher than he expected,Piecyk said that was no guarantee of success.

"The size of the initial clearing target provides few,if any, clues about the potential value of the auction," he wrote. "It'spossible that the initial target set by the broadcasters Stage 1 bids will beso high that it will yield an initial bogey that is too high for wirelessoperators to top, leading to additional auction stages and a lower amount ofspectrum cleared."

For the auction to close successfully, the forward-auctionbid prices must exceed the amount needed to buy stations in the reverseauction, including the $1.75 billion in repacking expenses the FCC hasbudgeted. If the forward-auction bids come in below what the FCC bid forstations in the reverse auction, the commission can either return to theforward-auction bidders and ask for more money or reduce the clearing targetand amount of wireless licenses it is offering. If the latter happens, theauction would move into a new stage of bidding.

But how likely is that really considering the variousanalyst estimates on how much the forward-auction bidders are preparing tospend? In November 2015, analysts at Wells Fargo reportedly saidthey expected the auction to bring in bids totaling $30 billion to $35 billion,with AT&T Inc.spending roughly $10 billion and VerizonCommunications Inc. spending $5 billion. Other estimates,meanwhile, have rangedas high as $80 billion.

Will 's John Legere be ableto control himself?

There is no doubt in anyone's mind that T-Mobile is preparedto spend big on the 600 MHz auction. During the company's April 26 earningsconference call,T-Mobile CFO J. Braxton Carter II gave investors an idea of just what kind ofwar chest the company has. Carter said the company had total liquidity ofroughly $10.5 billion, with much of that raised specifically for the purpose ofspectrum acquisitions. Carter said that the minimum liquidity for the businessis roughly $1.5 billion to $2 billion, giving T-Mobile $8 billion to $9 billionto play with in the auction. That is roughly in line with the earlier estimatesfrom Wells Fargo analysts, who said they expected the wireless operator tospend $8 billion on the auction.

Despite the ongoing quiet period around the auction,T-Mobile CEO John Legere has made no secret of the fact that he veritablyshivers with anticipation. During its April 26 conference call to discussearnings, he described the event as a "historic opportunity," addingthat the company plans "to participate with a successful outcome."

Will participate, and if so,to what degree?

Comcast has seemingly tried to downplay its interest inbidding on spectrum. During a February conference call, Comcast CFO Mike Cavanagh said the companywas going to "take a paddle in the auction" so that it could see whatwas available and at what price. "We're going to evaluate, consider andmay purchase, but only if we think the price is right after we do ourevaluation of what's available." He stressed that buying large swaths ofspectrum would not trump other priorities, such as spending $5 billion on sharebuybacks in 2016. Or, though Cavanagh did not say this at the time, buyingDreamWorks Animation SKG Inc.,perhaps.

Comcast CEO Brian Roberts echoed similar sentiments, notingthat registering as a potential bidder in the forward auction did notnecessarily imply any real commitment on the part of the company. "It's afree option, if you will, to get a paddle and see what the values are and howmuch capacity."

To put it in colloquial terms, Comcast gave the impressionit was suffering from FOMO, or the fear of missing out.

On the other hand, Comcast has a reputation for publiclyholding its cards close to its chest. When news surfaced that the cable giantwas in talks to buy DreamWorks Animation, for example, a Comcast executive saidduring an April 27 earnings conferencecall that the company would not be commenting on the "recentrumors or speculation about any M&A transaction." A day later, thecompany announced the$3.8 billion dealfor the studio.

In other words, it could be that Comcast is just trying toplay it cool.

Assuming the auctionis successful, what will broadcasters do with their newfound riches?

Just prior to the FCC's release of its clearing target, SNLKagan analysts Justin Nielson and Robin Flynn that the 12 major publiclytraded U.S. TV station group owners — including a pre-IPO , as well asComcast, 21st Century Fox Inc.,CBS Corp., ,Media General Inc.,Tribune Media Co.,Gray Television Inc.,Nexstar Broadcasting Group Inc.,E.W. Scripps Co.,Entravision Communications Corp.and TEGNA Inc. —could generate up to $13 billion from the auction. Notably, their estimateassumed a clearing target of 120 MHz.

This raises the question of how the broadcasters mightchoose to spend or invest this cash. One possibility could be using it to fundacquisitions.

But Carl Salas, Moody's vice president and senior creditofficer, does not believe that is the case. In an April 29 report, Salas saidhe expected the auction to be a credit neutral event, despite the "'once-in-a-lifetime'cash windfall" that some companies may receive.

"We believe the auction and cash payout will be creditneutral, with rated broadcasters more likely to direct their winning bidstowards shareholders than to repay debt or to make capital investments,"he said.

Nevertheless, between the auction and political ad spending,Salas expects 2016 to be a very good year for broadcasters in general.

"A successful FCC spectrum auction may serve only tooverflow the coffers of broadcasters already gearing up for a political adwindfall in 2016," he said.