AT&T: EchoStar Spectrum Purchase Comes at High Cost but Provides Strategic Benefits

Key Morningstar Metrics for AT&T

• Fair Value Estimate: $26.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

AT&T T will acquire 600 MHz and 3.45 GHz wireless licenses from EchoStar for up to $23 billion. Regulatory approval is far from certain, but we believe it’s more likely than not.

Why it matters: The 3.45 GHz licenses provide AT&T with midband spectrum across the US that it can utilize very quickly to help close its gap with rivals T-Mobile TMUS and Verizon Communications VZ. Midband spectrum provides network capacity.

• Only T-Mobile extensively uses the 600 MHz band, providing the coverage layer for its network. AT&T will need years to fully deploy 600 MHz on its network.
• EchoStar gives up about one-third of its total spectrum holdings, including most of its low-band licenses, effectively removing it as a long-term threat in the traditional wireless market. EchoStar’s Boost business will now use the AT&T network more extensively under a new wholesale agreement.

The bottom line: While AT&T agreed to pay a $9 billion premium over the amounts EchoStar originally spent on these licenses, we maintain our $26 per share fair value estimate. Our valuation model already assumed nearly $40 billion in wireless spectrum investments over the next decade.

• Because AT&T already uses the 3.45 GHz band, adding additional licenses here reduces some future capital spending needs. AT&T also becomes the only natural buyer for the remainder of this band. The 600 MHz band could have strategic value that AT&T can use to trade for other licenses.
• This transaction solidifies our narrow moat rating on AT&T and its wireless peers. However, the high cost of wireless spectrum continues to limit returns on capital.

Big picture: We expect Verizon and T-Mobile will pick up most of EchoStar’s remaining traditional wireless licenses, leaving EchoStar to focus on the AWS-4 band and its emerging satellite efforts.