In the past, EM growth has been a major driver for some of the developed market equity stories. Telefonica’s expansion into Latam was one of the big telco stories from the mid-1990s. Telenor’s aggressive Asian expansion in the early part of this millennium also made their equity story stand out as core EU earnings were under pressure. However, EM exposure for developed market telecoms companies has been gradually diminishing over the past 5 years and Telefonica’s announcement this week that it now defining all of its Latam assets ex-Brazil as non-core (see HERE for our view) marks a further retreat. However, arguably no EM market has been more volatile than India. Last week we took Vodafone management around London (see HERE for more details), and one of the key concerns that shareholders were bringing up was India and whether Vodafone could be liable for yet more cash injections into India on top of the £17bn already committed over the past 10 years. However, just as the roadshow was entering its final meeting, the Government announced a moratorium on spectrum fees, potentially marking a major inflection point in Government thinking and suggesting the risk-reward is now skewed to the upside (see HERE for more details) and EM exposure could potentially become a major driver for a developed market telco again.
In another busy week, we have already published notes on C-Band (LINK) and legal issues relating to DISH’s licenses (LINK). In this note, we focus on last week’s developments on the upcoming trial about the big wireless merger. We discuss why John Legere’s upcoming resignation incrementally undercuts his credibility as a witness, how the DOJ’s surprising motion, and unsurprising loss, to disqualify the states’ outside counsel reflects Delrahim’s nervousness about the trial and incrementally undercuts the companies’ argument that the court should defer to the DOJ’s judgement, and why it might be that discovery issues focus on DT/TMUS communications. We also provide a mediation on Presidential involvement in our sector, prompted by his impact on the C-Band process and his suggestion that Apple should help with America’s deployment of 5G networks. Finally, we plan on being off the coming week (and would be very thankful if the fates make that possible) but want to wish all our readers a wonderful Thanksgiving Day holiday.
This week we were often asked whether DISH would be able to sell their spectrum licenses, like broadcasters and mobile carriers do all the time, with little FCC objection or process and no sharing of proceeds with the government,Other than, of course, taxes. or would such a sales effort to sell trigger the FCC to claim that the proceeds should largely go to the government. In this note, we detail why we think it is clearly the first.
With another big news week, we are splitting the Weekend Update into two notes; this C-Band focused one and another, to arrive Sunday night, providing an update on the merger and other telecom policy news. (We are also publishing this morning a note discussing why DISH should be able to sell its licensees without the government taking the proceeds, a question that came up a lot this week: LINK).
In this C-Band note we discuss what we have learned, and the critical questions still to be answered, in the first week of the FCC’s new C-Band direction (which we refer to as Version 3.0) of running the auction itself. We think the initial stakeholder and political reactions demonstrate that the question of the private v. public auction is no longer in play, that CBA’s leverage to obtain funds lies not in threats about litigation or the narrative about how political leadership is depriving America of leadership in 5G, but only in its leverage related to the time to clear 300MHz, that the process is likely to go down both a legislative and regulatory track but the FCC is likely to finish before Congress, probably rendering Congressional efforts moot. We think both tracks will be bipartisan, which is important for reducing any political risk of election results causing another rethink and a C-Band version 4.0. We don’t have new insight into what may be the most important investment question, which is which enterprises the FCC believes should receive funds beyond relocation expenses and, further, between those enterprises, how should any funds be sized and allocated.
Once those questions are answered, however, there are multiple ways of effectuating that distribution though each carries different political and litigation risks. Part of the calculus requires estimating the results of the auction and calculating those requires understanding the other spectrum bands that will also be coming into the market.
We got a fright when we saw T-Mobile announce a conference call for Monday morning with no mention of what it would focus on. We worried that they may announce that they were abandoning the deal. I am not sure why it didn’t occur to us that Legere might be stepping down to focus his energies on Slow Cooker Sundays.
As we broke open the models in preparation for the call and started running through scenarios around what might come next for each of T-Mobile and Sprint, we realized that the world had changed quite materially since we first set out our thesis for the deal. We have some work to do mapping out the no-deal scenarios in more rigorous detail, but in the meantime, we have some thoughts on what the options for both companies are, and the pros and cons of each.
Over the weekend, we wrote that the C-Band policy was about to move to Version 3.0. (LINK) Yesterday, a one-two punch from Chairman Pai and Senators Thune and Wicker set the framework for that new version.
First, in a tweet, Pai committed to an FCC auction by the end of 2020. The tweet was consistent with our weekend view that the FCC order will not be circulated until early next year.
Second, Senators introduced legislation that would also require an FCC auction by the end of 2020 and in addition, “require the FCC to capture for the taxpayer at least 50 percent of the fair market value of the spectrum.” That means that the most CBA could obtain for its members would be an amount equal to 50% minus relocation expenses to other current users. Unlike the CBA proposal offered Friday, the proceeds would be pre-tax. As we had discussed, Eutelsat saying that the satellite companies should get at least 50% may have seemed to them like it was setting a ceiling but to members of Congress, that was the floor. (LINK)
So what happens now? We will let our colleague, Vivek Stalam, discuss the financial implications for Intelsat in a separate note, while we focus on the new policy direction.
T-Mobile announced that John Legere is stepping down as CEO on April 30th, 2020 and Braxton Carter is extending his contract until July 1st, 2020. The announcement of the transition is no surprise; Sievert has been the heir apparent for some time; however, the timing is a little surprising. The company attributes the timing to removing an uncertainty around the continuity of leadership and of the Un-carrier strategy ahead of the trial. This strikes us as plausible.
For our part, we expect T-Mobile’s current path to continue under Sievert; we suspect he has played a strong role in shaping T-Mobile’s strategy for years. We doubt the management change will materially impact the prospects for the case at trial. As such, the announcement has no impact on our thesis.
Blair Levin, our partner on regulation and policy, has given the deal less than 50% odd of approval for some time (see most recent comment HERE). We think the deal ought to go through (see thoughts HERE), but we understand why it may not. We are comfortable owning T-Mobile’s stock either way.
We continue to see an opportunity for tremendous value creation if T-Mobile acquires Sprint (it is more than just synergies; see our evolving thoughts on the value of capacity and unit costs HERE on slide 6). The opportunities for the company may not be quite as good without Sprint; however, we see upside in that scenario too.
For investors last week, there was only one story that mattered: the last-minute change in signals from the FCC regarding C-Band and the subsequent drop in Intelsat stock. In this weekend update, we analyze the causes and endgame of the shift. As we have warned, it appears that Congress (particularly Senator Kennedy) and the White House are now material players on the issues of who runs the auction and how the proceeds are distributed. While CBA attempted to resuscitate its plan with a specific offer to transfer funds to the Treasury, we think that effort will likely fall in the category of too little, too late, as the FCC moves in towards an FCC run auction with more proceeds likely to go to the Treasury. CBA, however, retains significant leverage and is still in a position to achieve much of their original goal. While much of the discussion has been about who runs the auction, we point out how an FCC run auction can provide significant funds to various stakeholders in ways that also directly are tied to achieving public purposes. We also discuss how details of the transition are likely to move towards the front-burner in the next round of public comments. Finally, we briefly discuss a quiet week, from an investor perspective, in the big wireless deal and why Labour’s proposal to nationalize British Telecom will not travel across the Atlantic.
Continue reading “C-Band: Four Corners Defense Breaks; Brings On C-Band Policy 3.0. Plus, Nothing (Much) New on TMUS/S/DISH and Quick Thought on Potential Impact of Labour Urging Nationalization of BT”
Trying to turbocharge Vodafone’s inflection
Is opening your network to wholesale partners a value-accretive move? This is one of the debates that has raged in European telecoms for as long as any of us can remember and Vodafone seems to have been at the heart of this debate for years. Hence, the announcement last week for Vodafone to sign a wholesale MVNO agreement with Virgin Media (see HERE) marks a substantive turning point that should help to turbo-charge their recovery; make life tougher for existing providers of wholesale access; and help out the MVNOs. We pick the winners and losers from this.
In this weekend update, we explain, among other things, why the FCC order on TMUS/S may mean more for future deals than the one it approved, how the new New T-Mobile commitments may fit into their trial strategy, what to expect in terms of unexpected facts emerging at trial, and how the DOJ’s late inning Hail MaryForgive the mixed metaphor, but the effort does remind us of trying to win a baseball game by throwing a pass. See details below. to disqualify the states’ legal team is unlikely to succeed (but if it does it would have a big, though not entirely predictable, impact.) On the C-Band side, we review the different approaches of CBA, Eutelsat, AT&T, NAB and Senator Kennedy and how each highlights the different legal and political risks that alternative FCC policies would create. With just a week and a half to go before the likely publication of the proposed FCC order, there is still significant disagreement between the stakeholders as to how detailed the order should be as to the sales process and the transition, with AT&T continuing to support the CBA effort in terms of vision while criticizing the lack of details and laying a foundation for why the lack of details spells litigation trouble. Further, CBA still is staying silent on what it means by a significant voluntary contribution, while Eutelsat provides more details on its 50% ceiling (that members of Congress would see as a floor).