The Commonwealth Bank of Australia has forecast that telcos will stump up $5.5 billion or more for new and relicensed spectrum in the next three years, as a result of communications minister Stephen Conroy’s move to shore up auction prices.
Conroy’s removal of control of reserve spectrum auction pricing from the Australian Communications and Media Authority, has left the industry expecting that he will personally lay down reserve prices. And with VHA signalling it won’t be competing full-tilt at the auction, coupled with the pressure on the federal government to deliver its promised budget surplus next year, those prices could be set relatively high.
In a newly released equities analysis, CBA forecast Telstra alone to shell out just under a billion dollars at the auction, at a base case spectrum cost of $0.20/MHz/pop for 2.6GHz and $0.75/MHz/pop for the prized 700MHz band. Assuming Telstra and Optus both go for 2x20MHz and VHA for 2x5MHz of 700MHz, the CBA analysts put the total industry spend at auction at $2.2 billion.
But the analysts’ bear case forecast, with reserve prices set in line with the 850MHz renewal prices from the start of the year, put 700MHz at 1.25A$/MHz/pop and 2.5GHz at A$0.45 – and would see Telstra spend almost $1.8 billion at auction, with the bill for the entire industry coming in at $4.05 billion.
“We had been increasingly hopeful there could be downward risk to spectrum auction prices given Vodafone’s reluctance to spend (as long as reserve prices were reasonable),” commented CBA analysts Alice Bennett and Nathan Burley (pictured). “However, it now looks more likely prices will be forced higher by the minister.”
850 PRICE EXTREME? “In spectrum relicensing costs announced in February 2012, the crucial 850MHz band was priced at $1.23/MHz/pop. In our view, this was extreme on almost every measure and global comp basis, however, the telcos had no choice but to pay. After numerous digital dividend spectrum auctions in Europe and North America, the average price is ~$0.6/MHz/Pop (significantly below what is required to achieve lofty auction expectations outlined in the media). While it would have been difficult for ACMA to set 700MHz reserve prices above this sort of levels, we suspect the minister will be more willing to set prices that deliver his preferred revenue outcomes.”
Of course, the renewal fees themselves – set in February, also by Conroy – will add substantially to the capex outlay. CBA estimates the total relicensing cost for the mobile operators at $3.3 billion between FY13 and FY15. On the base case forecast for the dividend spectrum auction, that would bring total spectrum spend to $5.5 billion over the same period: $2.2 billion for Telstra, $1.5 billion for Optus, $1.6 billion for Vodafone and $180 million for other spectrum users. And should the auction reserve prices be closer to CBA’s bear case, total spend would be correspondingly higher.
Nevertheless, CBA suggested that both Telstra and Optus would push considerable resources into at least getting the full 2x20MHz of 700MHz spectrum, even if they shelled out for less than the maximum allowed in 2.6GHz, and that VHA would still bid “as long as reserve pricing is not prohibitively high.”
“Telstra has generally historically spent almost whatever is required to get the maximum spectrum allowed under the rules. Despite Telstra’s large FY13 spectrum relicense bill… this is likely again, especially given VHA’s strong spectrum in metro 1800MHz and Optus’ Vivid Wireless purchase giving it lots of metro TD-2.3GHz,” noted the analysts. “Prior to its purchase of Vivid, it was more important for Optus to acquire digital dividend spectrum than the other carriers, given past under-investment and less spectrum overall. However, now with significant metro 2.3GHz spectrum, it will be most focused on 700MHz given existing lack of low frequency spectrum bands and regional spectrum.”
Deutsche Bank analyst Vikas Gour, meanwhile, has estimated the 700MHz auction price at around $1.2/MHz/pop and 2.5GHz at A$0.20, which would put Telstra’s auction bill at some $1.5 billion.