Which stocks will come out on top with the 5G airwave battle?

An Ofcom auction starting tomorrow will fire the starting gun on a major infrastructure upgrade.

A battle for 5G airwaves gets under way tomorrow when BT (LSE:BT.A) and Vodafone (LSE:VOD) join rivals Three and O2 in bidding to secure the bandwidth needed for better and faster mobile services.

The Ofcom auction process is likely to take several weeks to complete, with the four companies able to bid for 5G spectrum across two different frequency bands. A previous 5G auction in 2018 raised £1.4 billion, double the amount that City analysts had expected.

UBS analyst Polo Tang warns an expensive auction will be unhelpful for investor sentiment on all the UK mobile network operators, with EE owner BT having the highest relative exposure.

• Invest with ii: Top UK Shares | Share Prices Today | Open a Trading Account

The FTSE 100 company's cash-generating qualities once made it appealing to income-seeking investors, but this has since been undone by the pandemic and the need to prioritise modernisation of its network and tackle its pensions deficit.

Based on earlier spectrum auctions in Europe, Tang estimates that total proceeds from the UK process could be in the region of £3.6 billion, with BT paying £1 billion — more than the current City consensus for around £740 million.

BT shares were today 1.35p lower at 135.75p, compared with 97p in November and Tang's 111p target price. The stock bounced as much as 7% after the Budget's two-year tax break on capital investment provided a potential boost for its full-fibre broadband roll-out.

• Vodafone confirms massive IPO and big dividend
• Shares round-up: Spirent Communications, Marshalls
• Are you saving enough for retirement? Our calculator can help you find out

The Ofcom auction will increase the total amount of spectrum available for mobile technology in the UK by nearly a fifth. Any device that communicates wirelessly needs spectrum – such as televisions, car key fobs, baby monitors, wireless microphones and satellites.

Ofcom is releasing 80 MHz of spectrum in the 700 MHz band, following a four-year programme to clear the band of its existing uses for digital terrestrial TV and wireless microphones.

These airwaves are ideal for providing good-quality mobile coverage, both indoors and across very wide areas – including the countryside. Releasing these airwaves will also boost the capacity of today’s mobile networks and offer customers a more reliable service.

There is also 120 MHz of spectrum in the 3.6-3.8 GHz band. These airwaves are part of the primary band for 5G and capable of carrying lots of data-hungry connections.

All four of the biggest mobile operators have launched 5G in the last year and releasing these airwaves will help increase the capacity and quality of mobile data services.

The bidding had been due to start in January but was put back to Friday due to the pandemic and after some mobile operators argued for the spectrum to be allocated through an administrative process rather than an open auction.

Ofcom has imposed a 37% cap on overall spectrum holdings, limiting the amount that individuals companies can bid for. The process also involves Three owner Hutchison 3G and O2 owner Telefonica (NYSE:TEF).