Verizon Wireless Allies With Cable in $3.6 Billion Deal

Verizon Wireless, the largest U.S. mobile-phone carrier, struck an alliance with cable companies that will change how customers buy Internet, mobile and pay-TV services and present new challenges for rivals such as AT&T Inc. (T)

Verizon Wireless will pay the group $3.6 billion for wireless spectrum, the companies said today in a statement. Comcast Corp. (CMCSA), the country’s largest cable provider, will receive $2.3 billion, while Time Warner Cable Inc. (TWC) gets $1.1 billion and Bright House Networks LLC gets $189 million.

Verizon Wireless and the cable companies will also market and sell each other’s services under the agreement. The Basking Ridge, New Jersey-based mobile carrier will offer cable-TV products in its retail stores and receive a percentage of revenue for every cable customer it signs up, while cable companies will receive fees for each wireless customer they sign up, according to Time Warner Cable spokesman Alex Dudley.

“This is a strategic masterstroke for Verizon,” Craig Moffett, an analyst at Sanford C. Bernstein & Co., said in a note today. The agreement will lead to “a complete reordering of the competitive universe as we know it today.”

The deal allows Verizon Wireless to add airwaves as customers increasingly use smartphones such as Apple Inc.’s iPhone to watch video and browse the Web. AT&T, the second- largest U.S. wireless operator, has been trying to add capacity through its proposed acquisition of T-Mobile USA, though the U.S. Justice Department has sued to block the deal.

Verizon Communications Inc. (VZ), which co-owns Verizon Wireless with Vodafone Group Plc, rose 0.2 percent to $37.85 at the close in New York. Comcast gained 3.5 percent to $23.36 and Time Warner Cable gained 4.7 percent to $63.80.

New Partners

The deal allows the cable companies to offer wireless services to their customers without investing in their own network or acquiring a wireless company, Neil Smit, a Comcast executive vice president, said in an interview. After four years, Comcast, Time Warner Cable and Bright House can market Verizon Wireless service under their own brands. The cable companies will be able to bundle and price the service as they see fit, according Smit.

The two largest U.S. cable companies can offer wireless voice and data along with home phone, broadband and TV in one bundle, said Smit, potentially offering discounts for customers that sign up for multiple services. Time Warner Cable will also sell Verizon wireless products, such as Apple Inc. (AAPL)’s iPhones, in its retail stores, said Dudley.

“Frienemies”

The partnership between Verizon Wireless and cable comes as Verizon Communications sells FiOS, a broadband and television service that directly competes with cable offerings. The partnership may make Verizon and cable operators more cooperative “frienemies,” said David Joyce, an analyst at Miller Tabak & Co. in New York. Comcast and Time Warner Cable could benefit if Verizon feels less compelled to create undercutting price promotions against its new partners, he said.

“This might slow the competitive push from FiOS to drive down prices, which could help the cable companies,” said Joyce in an interview.

Verizon FiOS will continue to compete aggressively with Comcast and Time Warner Cable in overlapping markets, said Verizon Wireless Chief Executive Officer Dan Mead.

“It’s the nature of our business in wireless now,” Mead said in an interview. “You’re competitors one minute and suppliers or partners the next.”

There is only a 15 percent overlap in Comcast’s region with Verizon’s FiOS, according to Comcast spokeswoman Jennifer Khoury, which made Comcast more willing to strike the deal. Time Warner Cable has an 11 percent overlap, said Dudley.

Changing Wireless Landscape

Time Warner Cable is selling its spectrum for a 74 percent premium after originally purchasing it for $632.8 million in 2006. Comcast bought its spectrum for $1.29 billion in 2006, earning a 78 percent increase.

The deal may put additional pressure on Sprint Nextel Corp. (S) and partner Clearwire Corp. The cable companies have had a partnership with Clearwire, in which Sprint has a majority economic interest, that allows them to resell Clearwire’s wireless service. Comcast has 30,000 wholesale customers and Time Warner Cable has 27,000. Comcast and Time Warner Cable will stop offering Clearwire service within six months, according to Smit and Dudley.

“It aligns the cable companies with Verizon Wireless in the near and longer term,” said James Ratcliffe, an analyst at Barclays Capital. “That means a close partnership with Sprint becomes very unlikely at this point.”

Sprint, Clearwire

Sprint’s ability to be “a viable partner” to the cable industry is now in doubt, according to Moody’s credit analysts Dennis Saputo and John Diaz. Clearwire (CLWR) also is “a loser,” wrote Saputo and Diaz, as it effectively ends the probability that cable will provide more funding for the money-losing company.

Susan Johnston, a spokeswoman for Clearwire, and Scott Sloat, a spokesman for Sprint, declined to comment.

Clearwire rose 5.4 percent to $2.14 and Sprint dropped 3.7 percent to $2.60.

The partnership also removes an option for Deutsche Telekom AG’s T-Mobile USA if its acquisition by AT&T falls through. T- Mobile would have been able to enhance its competitive position by buying cable’s spectrum, said Moffett. Deutsche Telekom fell 3.1 percent to 9.26 euros.

Regulatory Approval

The partnership still needs approval from regulators. The Federal Communications Commission will “undertake a thorough, fair and fact-based review of the proposed transaction,” according to FCC spokesman Neil Grace.

The FCC and Justice Department are likely to approve the deal, though they may require the sale of assets in certain markets, said Jeff Silva, senior policy director for telecommunications, media and technology at Medley Global Advisors LLC in Washington.

“This deal is likely to eventually get approved with possible divestitures in any markets that the FCC and Justice Department find that Verizon would have excessive spectrum concentration,” he said.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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