What’s new: AT&T and Lilac just announced a transaction for AT&T’s mobile assets in Puerto Rico and the US Virgin Islands. The rumored price of $2BN is reasonable, suggesting a multiple of close to 6.5x EBITDA. LatAm mobile assets should trade at roughly 6x; there would be synergies from fixed / mobile consolidation, as Lilac owns the Cable assets in Puerto Rico. We believe the sale will be modestly dilutive to earnings and FCF per share for AT&T, though the subscriber mix is of lower quality than AT&T overall (mostly prepaid). The $2BN brings AT&T’s total proceeds from asset sales to over $11BN (including receivables sales and other nonsense). We now have little doubt they will meet their leverage threshold of 2.5x by year-end. AT&T confirmed share repurchases would be “part of the mix” for 4Q19. No change to thesis for AT&T.
Transaction details: AT&T is selling mostly-wireless assets in Puerto Rico and the US Virgin Islands for $1.95BN. We estimate the assets generate $300MM in EBITDA, representing a 6.5x EBITDA multiple, and have slightly higher capital intensity (~20%) than the overall wireless business. Altogether, we expect the deal to be <1% dilutive to EPS and FCF per share. The transaction includes 1.1MM mostly prepaid wireless subscribers. The companies expect the deal to close in 6-9 months, following regulatory review from the FCC and DOJ.
Thesis impact – AT&T: We have been conflicted on AT&T recently. We have seen early signs of a turn in the wireless business as AT&T deploys 60MHz of new spectrum (see report on churn trends HERE). We have held back on upgrading the stock because we think expectations for their other businesses look too optimistic. Our interest was piqued by Elliott’s push for changes at Warner Media and for exploring a sale of DTV (see thoughts on Elliott letter HERE); however, Stankey’s recent statements suggest little prospect of a DTV sale or of near-term changes in Warner Media’s leadership (LINK). This leaves us back where we started, wishing we could own AT&T’s Wireless Business at current multiples, but unwilling to buy into AT&T in its entirety. This transaction doesn’t change things.
In this week’s update we discuss the biggest questions of the week on the wireless merger (including on the impact of Florida joining the DOJ, the status of the FCC order, why the likely witness line-up helps the companies in litigation, and what is Softbank doing with Huawei), C-band (what is Senator Kennedy up to, what are the broadcasters up to, and why hasn’t CBA filed a new sales plan), a potential DBS deal (getting a big boost from Pai and maybe from an internal AT&T reorganization), Techlash (what the Zuckerberg/Warren press battle tells) and a few telecom policy implications from the DC focus on impeachment.
Continue reading “Top Q’s and A’s for TMUS/S/DISH, C-Band, DBS merger, Techlash and Impeachment”
It’s the World Athletics Championships at the moment so a few shameless athletics metaphors. Watching the telecoms sector in Europe over the past 20 years has been similar to watching the flight of the javelin….soaring returns from 1998-2008, followed by a steady crash back to earth in the following 10 years from 2008-2018. However, with the sector now trying to haul itself out of the proverbial sandpit, we see three easy steps for the sector to start to regain its past glories and head to the top step on the medal podium. We wrote an updated view on our optimism on the European telecoms sector this week (see HERE), and see three easy steps for the sector to offer really attractive returns for investors and be positioned to outperform.
Read on to follow our European triple jump to gold.
Continue reading “Hop, skip, jump….the triple jump to value creation”
We hosted a lunch with Zac Smith, CEO of Packet, yesterday. Packet is a micro edge data center company that provides bare-metal servers for enterprise customers. The rise of micro edge data centers has important implications for towers, data centers, and carriers. For the towers, we came away thinking that micro edge data centers could drive upside, though the size of the opportunity remains opaque and likely immaterial to financials over the next several years. For data centers, Packet’s views reinforce our preference for Equinix over the wholesale players. For carriers, Packet’s deployments with Sprint, along with the proposal they submitted for Dish’s network build, suggests there is upside for carriers to deploy services for enterprises at micro edge locations.
Continue reading “Packet CEO Lunch Takeaways”
We hosted a client tour visiting all the telcos in the early 5G markets in Asia: Japan (feedback HERE), South Korea (HERE) and China (HERE), and finished the trip with a day at Hauwei’s HQ in Shenzhen (HERE). Our key takeaway is that we may have been too cautious on the likely revenue impact 5G & IoT is set to have on revenues in these markets. Thus our view shifts from seeing 5G as largely neutral to revenue and overall a negative because of the impact on capex, to potentially a meaningful positive driver of shareholder returns through higher growth. Running the math on this and it seems plausible for the winning companies in these markets (which we would see as Softbank, LG U+, China Telecom) to see mobile service revenue growth head towards high single digit, or even low double digit as the 5G wave impacts their business models, with potentially significant impacts on equity valuations. However, we would hesitate to read across from what is happening in these markets to a more positive view on 5G globally especially in markets which don’t have the site density and capacity to satisfy very high levels of traffic as high end packages shift from 20-30GB/month to 100-200GB/month (and to ‘properly unlimited’ services).
Continue reading “Learnings from the first large scale 5G deployments in Asia”
Yesterday, FCC Chairman Pai and Commissioner O’Rielly spoke at the Americas Spectrum Management Conference. Their comments reiterated the timing of a C-Band order that adopts the CBA proposal as coming in the “fall”. In our Intelsat initiation report from last week (LINK), we laid out a base case for Intelsat that would see the stock nearly triple, with the catalyst of an auction potentially coming as soon as 1H20. This timing and process appear to be on track at the FCC.
Continue reading “Comments From FCC Commissioners Positive For Intelsat”
Last week we held a call with an antitrust Lawyer Matthew Cantor, of the firm Constantine and Cannon. Not only is Mr. Cantor a distinguished antitrust lawyer with experience in telecommunications and media matters, he is also one of the few lawyers who has ever tried an antitrust case before Judge Victor Marrero, the judge who will preside over and decide the states’ challenge to the TMUS/S deal.
Attached, please find a transcript for that call. But first, we’d like to summarize some key points, with actual quotations edited for brevity.
Continue reading “Summary of Call with Antitrust Expert Matthew Cantor Regarding Judge in TMUS/S Trial”
In this weekend update, we attempt to unravel the mystery of why the FCC order on the merger has not yet emerged (hint: rhymes with Tar) and why DISH has not yet made announcements of corporate deals that would help the merger get through the state litigation. We also provide quick takes on Pennsylvania’s entry as a plaintiff, the California PUC, news flowing from investor conferences, and disagreements over the trial calendar. We also try to interpret the vague messages being sent by Congress to the FCC on C-Band and close by noting a new case that could (but probably won’t) lead to a significant deregulation of cable, telephone, and mobile companies.
Continue reading “TMUS/S and the Sounds of Silence; C-Band and the Hum of Congress.”
We were worried about a recession at the beginning of the year, and published a report quantifying the exposure of our companies in the event of a recession. It was all for naught. The economy soldiered on, despite worries and warning signs. Well, we are still worried, and so we updated our recession exposure framework for the US and republished it this weekend (see report HERE). We summarize our findings on exposure in the US in this edition of the Global Weekly review. We also gathered thoughts from the team on what to buy and sell in Europe, Asia and Latin America. We are sorry to ruin your Sunday with gloomy thoughts, but we thought you should at least have our list of what to avoid if it all goes “pete-tong”, and our list of what to buy at the bottom.
Continue reading “What to buy and sell if it all falls apart”
Both AT&T and Dish management teams have talked down a merger between their satellite pay-tv businesses this week due to fears for how a proposed deal would be received by regulators (LINK). To that we ask, “really”? Even Blair thinks the deal could get done, as he wrote in a weekend update earlier this month (HERE). This isn’t 2002. 93% of household have dozens of choices among pay-tv providers, and I am sure the companies can dream up a fix for the 7%. The biggest “regulatory” obstacle may be the President and his undying desire to punish CNN. We covered the merits of the combination briefly in our note on AT&T following the Elliott letter (HERE). We see two challenges. The first is that everyone agrees that combining the two satellite businesses would be good, but neither company wants to own the combination. Second, both Dish and AT&T need cash out of the deal. These are structuring problems, not regulatory problems. Cue, the clever bankers.