Why the FCC Won't Block Verizon's Pending Deal With Cable Operators
Verizon Wireless, a joint venture between Verizon Communications (NYS: VZ) and Vodafone (NAS: VOD) , hopes to collect underused airwaves in a pending deal with cable providers. However, the deal faces approval by the FCC and the Justice Department -- the same two agencies that recently killed AT&T's (NYS: T) deal with T-Mobile.
In early December 2011, Verizon agreed to pay $3.6 billion for spectrum from cable companies led by Comcast, Time Warner Cable, and Bright House Networks. Verizon also made a separate marketing agreement that the companies could sell each other's products.
Already the country's largest mobile phone carrier, Verizon -- along with its shareholders -- would find the arrangement a huge win. The deal would enable Verizon to sell more 4G LTE services to more customers, not to mention take much-needed spectrum off the table -- leaving fewer resources for rival carriers. Comcast would benefit the most as far as sellers go, grabbing $2.3 billion in the deal. Time Warner would claim $1.1 billion, and Bright House squeezes out a cool $189 million from the transfer.
But not everyone wins.
Winners and losers
Other telecom companies are fighting the acquisition. T-Mobile issued a statement to the federal government urging it to reject Verizon's bid. The carrier said the deal would rob smaller companies, such as itself, of valuable resources and decrease competition in the industry. MetroPCS (NYS: PCS) also filed against the transaction, stating that the deal is not in the public interest.
The joint-marketing side of the Verizon-Cable exchange also has its share of critics, including politicians such as Sen. Al Franken (D-Minn.). Concerned that the deal would put Verizon and the cable companies on the same team, Franken penned a letter to the FCC in which he wrote, "I fear this will ultimately mean less competition, less choice, and higher prices for consumers."
However, the FCC could just as easily justify the deal on the basis that it satisfies an unmet consumer demand. Mobile users want more data and faster downloads -- and carriers want to give it to them. For cellular companies, more bandwidth means more sales. Putting more airwaves into use would help Verizon support a growing number of smartphone users.
What lies beneath
Despite the public outcry, the FCC will probably pass the deal, because it temporarily solves the problem of unused spectrum. In 2006, the FCC sold the spectrum to a joint venture of Comcast, Time Warner, and Bright House, with tentative plans for putting those resources to work. Instead of using the spectrum, though, they tucked it away, and, according to the New Jersey rate counsel, it appreciated by more than $1 billion. Stockpiling spectrum until they could flip it for a profit looks bad for the FCC, which originally sold it to them. If the FCC approves the deal, Verizon will accomplish what it set out to do in 2006 -- get that spectrum into use.
Another reason Verizon will probably get the approval it seeks is that the FCC recently approved a bid by rival AT&T to buy spectrum from Qualcomm (NAS: QCOM) in a similar deal. Qualcomm sold 700MHz of airwaves to AT&T in a deal worth $1.9 billion in late December. Similar to the spectrum the cable joint venture owns, Qualcomm wasn't using the block of spectrum it sold in the deal with AT&T.
I'm betting the FCC grants Verizon regulatory approval of the new deal, but not without stipulations. Verizon may have to jump through a few more hoops before sealing the deal, but in the end, the mobile company and cable consortium will come out on top. While you're waiting for the regulator review of this deal, why not cash in on companies that are already winning in the mobile market? Get instant access to The Motley Fool's free report titled "3 Hidden Winners of the iPhone, iPad, and Android Revolution."
At the time this article was published Fool contributor Tamara Rutter owns Qualcomm. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and business news. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services have recommended buying shares of Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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