What Happens If The Spectrum Auction Fails?

Wells Fargo analyst Marci Ryvicker addressed the possibility that the FCC’s spectrum incentive auction may fail in a note to investors today.  

“The technical definition of auction failure is concluding Stage 9 (42 MHz cleared/ 20 MHz sold) with the Final Stage Rule still having not been met,” she wrote. “According to our math, we are still quite a ways away from this potential outcome. But with the forward auction going backwards in the two most recent stages, we did feel it time to gauge what might happen to our stocks should the previously unthinkable become our reality.”

Her overall conclusions:

• “We consider a failed auction more of a disappointment than a thesis changer for our broadcast stocks especially in light of a Republican administration.

• “Of the three broadcasters most ‘exposed’ to the auction, we view Sinclair Broadcast Group as the healthiest regardless and would view Tribune Co. as having the most potential downside risk to its stock price. (Media General is in the middle).

• “We particularly like Dish Network’s scarcity value.

• “We think Comcast’s risk/reward profile might actually go UP.”

Where are we now?

Stage 3 just finished, Ryvicker continued, with the broadcast “ask” falling to $40.3 billion (from $86.4 billion in Stage 1 and $54.6 billion in Stage 2) and the wireless “bid” falling to $19.1 billion (from $23 billion in Stage 1 and $20.8 billion in Stage 2). Unfortunately, it’s this $19.1 billion that is cause for concern, as we want the forward price to RISE, not FALL. We’ll get info on Stage 4 (84 MHz cleared, 70MHz sold) this Friday (Dec. 9).”

Why is the forward auction going backwards?

In analyzing the data, she said, “it looks like another bidder may have dropped out as every formerly fully-subscribed market in the top 50 partial economic areas (PEAs) saw a reduction in demand — typically of exactly one block. Markets outside the top 50 were a bit more mixed; but the fact of the matter is bidding units were down 7% from last round — so there were definitely fewer overall bids.”

What does this mean for overall spectrum values?

Ryvicker: “We’ve said all along that the problem with this particular auction wasn’t the spectrum — but rather the timing…. Simply put, we don’t believe this is a true reflection of all spectrum value.

A failed auction would be a disappointment, not a disaster, for broadcast.

Remember, she emphasized, “these stocks do NOT incorporate any potential auction proceeds. While we liked the auction given optionality it provided for de-leveraging and M&A, we think the political environment (and spec. the potential for media ownership relaxation) is more of a game changer than the auction ever was.

“In fact, we wouldn’t be surprised if some broadcasters think twice about participation — given reconsideration of potential station values. Of the three companies most exposed, we deem Sinclair as the healthiest no matter what happens; Tribune as having the most potential downside risk given overall sentiment; and Media General is somewhere in between (the Nexstar merger makes the auction irrelevant for this one).”

CMCSA’s risk/reward proposition actually goes up.

“No longer will we hear concerns about what Comcast might do with the potential ‘gobs’ of broadcast spectrum,” she wrote. “If the auction fails, it is over for everyone — there are no partial winners here.”