TWST: What is your coverage in the wireless sector?

Mr. Chaplin: I cover the communication services sector that includes AT&T (T), Verizon (VZ), Sprint (S), Clearwire (CLWR), Leap (LEAP), and MetroPCS (PCS). I basically cover all the big telecom companies.

TWST: What are the major investment themes you are watching in the communication services sector right now?

Mr. Chaplin: There are a couple of the big themes that we're watching right now. One is the evolution of data demand and the impact that has on spectrum, and how having or not having spectrum might shift competitive dynamics in the industry. That's probably one of the biggest themes that we're focused on at the moment. I think it has huge implications for the industry going forward.

A secondary theme that we're focused on is the evolution of the prepaid space. Our view is that as share shifts from postpaid to prepaid, we're going to see the competitive dynamics in that piece of the industry shift interestingly as well.

TWST: When you talk about spectrum and companies that have it and companies that don't, is there still spectrum up for grabs or is ownership established?

Mr. Chaplin: There is about 500 megahertz of spectrum which has been issued that's mostly in the hands of the carriers, and it's not nearly enough to handle all the demand that is out there now. AT&T, for instance, cited the need to get their hands on more spectrum as their primary reason for attempting an acquisition of T-Mobile (DTE.DE). That, obviously, didn't go through. They now need to seek spectrum from alternative sources. Verizon has been just through a whole slew of spectrum acquisitions, most recently their acquisition of 20 megahertz of almost nationwide spectrum from the cable companies. They had done some transactions right before that with Leap, and some other small transactions recently. AT&T, separate from the T-Mobile acquisition, bought a bunch of spectrum from Qualcomm (QCOM).

You've basically got a land grab for spectrum going on right now, and there is very limited supply, and it has interesting implications for a couple of companies. Clearwire is the one company out there with massive amounts of unused spectrum, and we think that their spectrum is going to increase in value significantly as data demand increases. DISH (DISH) has also managed to get their hands on a significant chunk of really valuable spectrum, which puts them in a very interesting position in the industry as well. But outside of those, Clearwire's unused spectrum, DISH's unused spectrum, there is not a lot else out there. LightSquared made a play with spectrum that looks like it's very challenged because of GPS interference issues. Beyond that, we're looking at a multiyear process to reclaim spectrum from other holders like the broadcasters.

TWST: You mentioned that DISH and Clearwire have unused spectrum. Does it look right now as if they are going to use that or are they going to try to sell it to other companies?

Mr. Chaplin: With DISH, it's anybody's guess. They're saying they'd like to use it themselves, and that they are going to build a wireless broadband business, which is possible. That may be their genuine interest. I think a lot of investors speculate that they're looking to sell either their spectrum position or the whole company to somebody like AT&T, who we think urgently needs more spectrum soon, or Verizon or somebody else in the industry.

TWST: So based on where we are right now, who are your top picks in this space and why?

Mr. Chaplin: I think the two most interesting names in this space in the near term are Clearwire, whom we've already talked about, and MetroPCS, and both on a similar theme. These are two companies that had a really hard time in 2011. From a stock performance perspective, they really got hammered.

In the case of Clearwire, we think with the breakdown of the AT&T/T-Mobile merger, there's going to be a big increase in demand for their spectrum. AT&T is going to need more spectrum. T-Mobile is going to need more spectrum. Leap and MetroPCS, who had planned to buy spectrum, need more specturm. So it creates a tremendous amount of demand for Clearwire's very scarce asset.

In the case of MetroPCS, the reason their stock got destroyed in 2011 was because their capex increased significantly, well above where investors expected it to be. The primary driver of that is because they don't have enough spectrum, they end up having to invest a tremendous amount in capacity on their network. If they had access to more spectrum, their capex requirements would fall dramatically. We think they're going to do a deal with Clearwire to get their hands on more spectrum. So both of those are the two most compelling names in the near term.

TWST: What happens when capacity runs out? What we do then?

Mr. Chaplin: Prices go up. There are two options, either moderate usage or demand or increase prices. Right now, we don't see a big demand moderation. Either the quality of service on wireless networks is going to go down or pricing is going to go up.

TWST: How can the big carriers, AT&T and Verizon, position themselves to better succeed based on the dynamics in wireless right now?

Mr. Chaplin: Verizon has been on a spectrum-buying spree, and they're probably in the best position of AT&T and Verizon, I guess, maybe even of the Big Four, in that they've got access to enough unused spectrum to get them through to when the next set of wireless spectrum comes on auction from the FCC, which we think will be sort of 2014, 2015. So Verizon is in fairly decent shape. AT&T is one where we think they have sort of a relatively urgent need to figure out what they're going to do to spectrum sooner rather than later. Their choices are relatively limited. As I mentioned, they can try to acquire some spectrum from DISH or Clearwire, and if something magical happens with LightSquared, maybe LightSquared. But these are currently the only sources of spectrum out there at the moment. There just aren't any other choices.

TWST: What about valuations? How are the valuations for communications services stocks?

Mr. Chaplin: Valuations are pretty bifurcated. You've got Verizon trading at a higher valuation than it has historically, also with the most solid fundamentals in the industry, and pretty solid fundamentals from a marketwide perspective. It's a megacap stock with decent top line and earnings growth that is the number one provider in the wireless industry with very strong margins that pays a big dividend in this kind of an environment. It's got a high valuation, but it's probably warranted. Most of the rest of the stocks trade relatively cheaply relative to historical norms.

TWST: What types of investors should be looking at this space right now?

Mr. Chaplin: Value investors and yield investors for the most part. Verizon will appeal to a broader range of investors. It's got a much more sort of growth, GARP, momentum following than any of the other names in the group.

TWST: Are any of these players looking at expanding outside of the U.S. into international markets?

Mr. Chaplin: AT&T and Verizon constantly look at assets internationally, but they haven't done any significant acquisitions for a while. They're always looking at acquisitions that could potentially increase the reach of their enterprise business or the depth of their enterprise business in a market that they're already in.

AT&T has looked at wireless opportunities internationally. They've got a tremendous position in the U.S. If they can export that scale advantage they have, they would. But neither of them have found anything particularly compelling in the last several years.

TWST: The AT&T/T-Mobile deal was a large potential merger that didn't go through. Are we going to see mergers in the space in the near term?

Mr. Chaplin: I think this is a consolidating space. It's a space that urgently needs consolidation. So I think we're far from done. I think in 2012 we're going to see mergers and consolidation, and we are going to continue to see a significant number of transactions over the course of the next couple of years.

TWST: Is the consolidation going to be among the carriers or will it include nontraditional wireless companies, such as the cable companies?

Mr. Chaplin: There are two consolidation themes. One of them is improving the market structure in wireless. The AT&T/T-Mobile deal didn't happen, but maybe a Sprint/T-Mobile deal could. That probably has to wait a year or two before it could happen because Sprint has got an awful lot on their plate at the moment. But at some point, that's a deal that makes a tremendous amount of sense.

In the meantime, you could see those companies start to consolidate networks and capture some of the benefits of consolidation without an actual merger. I think you'll see a lot of partnering and potentially a consolidation transaction around Clearwire. I think there is a decent prospect that DISH will be acquired. So those are all transactions in and around the wireless space, either acquisitions to get access to more spectrum or mergers or acquisitions or partnerships that improve the industry structure.

The one remaining theme within wireless is a cleanup of the smaller second- and third-tier carriers. For example, Leap and MetroPCS should have been put together years ago. That's a transaction that could happen. Both of them could be acquired by one of the smaller carriers like T-Mobile or Sprint. U.S. Cellular (USM) is another carrier that should have been consolidated away years and years ago and never has. Cincinnati Bell (CBB) has a wireless business that should have been consolidated away. There are still tremendous opportunities for consolidation in the wireless space.

The other area of consolidation is in wireline. You've got too many big national networks out there that don't have enough scale that need to be put together. Sprint has got one. Level 3 (LVLT), Global Crossing have two. They're in the process of being consolidated. Qwest (CTQ), CenturyTel (CTL) have one. Verizon has one. AT&T has one. Then there are a bunch of smaller carriers like Time Warner Telecom (TWTC) and a few others that all have more or less nationwide networks.

Then the carriers with big nationwide networks need a deeper footprint within metro markets. So there are opportunities for consolidation between those types of companies as well.

TWST: There is still a lot going on in the space.

Mr. Chaplin: Yes. This is an industry that's in flux and it's going to continue to be in flux for a while. We're in a multiyear period of consolidation and change.

TWST: Thank you. (LMR)

Note: Opinions and recommendations are as of 01/09/12.

Jonathan Chaplin

Senior Analyst

Credit Suisse

11 Madison Ave.

New York, NY 10010

(212) 325-2000

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