Verizon, T-Mobile to Swap Spectrum

Spectrum purchase has become a wireless game changer. The carriers are in need of additional airwaves to expand their high-speed services and support 4G LTE mobile broadband services. As a result, the wireless industry is intent on tapping unused spectrums to expand their capacity in 2012.

The U.S. wireless leader Verizon Wireless plans to swap radio spectrum from the fifth largest wireless service provider T-Mobile USA, a unit of Deutsche Telekom ( DTEGY ) . Verizon Wireless is a joint venture of Verizon Communications Inc. ( VZ - Analyst Report ) and Vodafone Group Plc ( VOD - Analyst Report ) .

Per the deal terms, T-Mobile will gain access to spectrum covering 60 million Americans in exchange for spectrum covering 20 million Americans and an undisclosed cash amount.

The deal would be beneficial to both companies, enabling them to expand the roll out of 4G LTE networks and improve their coverage. Notably, the transaction would boost the T-Mobile spectrum position in 15 out of the 25 markets, Philadelphia, Washington, Detroit and Seattle in particular. It would make T-Mobile a strong competitor against the larger rivals — AT&T Inc. ( T - Analyst Report ) and Sprint Nextel Corp. ( S - Analyst Report ) .

The proposed deal is awaiting the Federal Communications Commission’s approval, which is expected in late summer. The sale of airwave licenses will also depend upon the regulatory approval of the three pending spectrum deals with Cox Communications, Leap Wireless International Inc. ( LEAP - Analyst Report ) and SpectrumCo — a group of cable companies including Comcast Corp. ( CMCSA - Analyst Report ) , Time Warner Cable ( TWC - Analyst Report ) and Bright House Networks.

These pending deals, announced last year, are facing stiff opposition, in particular from T-Mobile, MetroPCS Communications Inc. ( ) and 10 other public interest groups. They argued that the purchase would lead to the concentration of spectrums in the hands of Verizon, which is already the largest U.S. mobile service provider with the maximum number of licenses.

The deal would also allow the cross selling of each other’s products and services, and raise concerns among some politicians and consumer advocacy groups. In order to gain regulatory approval, Verizon is aggressively looking for the sale of its 700 MHz A and B spectrum licenses.

Since the company’s spectrum deals are interrelated with each other, we will be carefully watching how it all unravels for Verizon. As a result, we are maintaining our long-term Neutral recommendation on Verizon. Currently, the stock retains the Zacks #2 (Buy) Rank for the short term (1–3 months).