Verizon Communications Inc (VZ)

[FUNMAN]

Verizon: Brace For A $40 Billion Bill
Jan. 19, 2021 4:27 PM ET

https://seekingalpha.com/article/4399742-verizon-brace-for-40-billion-bill?utm_medium=email&utm_source=seeking_alpha&mail_subject=vz-verizon-brace-for-a-40-billion-bill&utm_campaign=rta-stock-article&utm_content=link-0

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Summary

Verizon appears the biggest bidder at the just-completed C-band auction with a total estimated bill of up to $40 billion.

The wireless giant already has over $106 billion in net debt and needs to pay for Tracfone as well.

The stock is stuck below $60 as the company fails to offer meaningful growth while paying a hefty bill for spectrum.

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The 5G spectrum auction just ended with an incredible bill due to the domestic wireless providers like Verizon Communications (VZ). These companies already had large debt loads and so far have failed to charge much in the way of premium prices for access to 5G networks. My investment thesis is even more negative on this stock following the wireless giant spending upward of $40 billion on spectrum at the latest FCC auction.

Verizon logo
Image Source: Verizon website

Massive Auction
On Jan. 15, the 5G wireless spectrum auction ended with a total of $80.9 billion in bids for the C-band spectrum. A lot of the original analyst estimates had the auction only spending in the $30 billion range and now Verizon alone could've spent far in excess of that amount and possibly as much as the prior record FCC auction of $44.9 billion.

The auctions started on Dec. 9 and the FCC will unveil the winning bidders in February or early March. With a combined $13.0 billion in reallocation costs and incentive payments for the spectrum from satellite operators, the total costs to the wireless providers were ~$94 billion.

By most analyst estimates, Verizon has been the biggest spender in these auctions. UBS analyst John Hodulik estimates the wireless giant could spend an incredible $45 billion on the auction.

Previously, Raymond James had estimates of total costs to Verizon of $35 billion before the holiday break. Afterwards, another $11 billion in bids occurred which could easily push the Verizon bidding beyond $40 billion.

Cowen has the following estimates for just the spectrum spending:

Verizon: $35 billion
AT&T: $20 billion
Cable: $10-15 billion
T-Mobile: $10-15 billion
Dish: $0-5 billion
While Verizon needs the mid-band spectrum to compete in 5G with T-Mobile (TMUS) following their spectrum haul in the acquisition of Sprint, the move isn't a good sign for the stock. No other industry requires competitors to spend billions upon billions to just obtain the license to upgrade services. Imagine if Apple (AAPL) had to bid $40 billion every couple of years to offer the latest iPhone or Tesla (TSLA) had to bid an insane amount to offer an SUV EV.

Wells Fargo even estimates Verizon will spend $34 billion on the C-band auction and T-Mobile will still have 60% more spectrum in the low- and mid- band areas after the auction. In essence, Verizon may have spent double their initial plans and still end up short in spectrum holdings compares to T-Mobile.

Debt Impact
Verizon was already spending $3.125 billion on the Tracfone deal and the 5G spectrum auction will further tax the balance sheet. The company will surely have to pay over $40 billion in cash for these two transactions while the net debt levels were already at $106.6 billion.

Verizon will approach net debt levels of $150 billion after these transactions are paid. The company will actually have the same debt levels of AT&T (T) prior to their recent debt raise of $14 billion to fund part of their portion of the spectrum spending.

ChartData by YCharts
With Q3 interest expense of $1.044 billion, Verizon is paying ~3.6% interest rates on $115.6 billion in outstanding debt. At these rates, the additional debt could add $360 million in quarterly interest expense, or up to $1.44 billion annually.



Source: Verizon Q3'20 presentation

Verizon entered Q4 with $10.7 billion in free cash flow above dividend payments this year. The wireless giant isn't going to face any crisis where the dividend needs to be cut in the near term, but the free cash flow levels will decrease.

The main issue is the lack of financial flexibility, if something goes wrong in the business or interest rates rise. The company will be burdened with repaying debt for years, instead of investing in the business.

Takeaway
The key investor takeaway is that the stock has failed to trade beyond $60 due to the high expenses and low returns from 5G wireless investments. Analysts don't forecast long-term revenue growth in excess of 1%-2%, yet the company just spent an estimated $40 billion to acquire spectrum in order to remain competitive. Investors should avoid Verizon as the stock still appears headed for years of weakness due to the low dividend yield and high debt balance.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.