We attended the OnGo CBRS Commercial Service Launch event today, where we met with wireless carriers, Cable companies, tower companies, and other industry experts. We gained a ton of data points into how the spectrum will be deployed between different carriers and Cable companies. Overall, the insights from the event support our view that Cable companies stand to benefit the most from CBRS.
In our Intelsat (Buy; TP: $54; +131%) initiation report from earlier this week (LINK), we highlighted the nature of the Congressional risk to the CBA and its members. While our view has been that an actual law is unlikely, Congressional headline risk remains high. The latest “encouragement” from Senator Kennedy (R-LA) in a draft bill markup is in-line with this view: it has no legal impact on the process, but indicates that some in Congress are still looking closely at the matter. We expect continued headline risk going forward, but Congressional action remains unlikely.
DOJ Antitrust Chief Makan Delrahim, along with FTC Chair Joe Simons, appeared at a Senate Antitrust Oversight Committee yesterday. Most of the questioning was on the various antitrust efforts directed to constrain the power of big tech companies, but there were some questions on the approval of the T-Mobile/Sprint deal. Some, such as noting the hotel preferences of T-Mobile executives, had political meaning but, in our view, no meaning in terms of the trial. We were, however, struck by three comments Mr. Delrahim made, one of which we think is likely to be used at the trial. The other two probably won’t but nonetheless, in our view they call into question the strength of some of the companies’ argument for the deal.
I had a very unusual week last week. I was marketing in Europe and spent a good part of every meeting talking about AT&T (thanks Elliott). I haven’t seen this much interest in AT&T since the 2007 – 2010 period, when they were the only US Carrier able to sell the iPhone.
We considered upgrading AT&T around 2Q19 results. Our interest was piqued by data that may have signaled an inflection point in churn. It seems that the new spectrum AT&T is deploying is driving a marked improvement in network performance. If this drives improved churn, as we think it should, then AT&T should see subscriber growth accelerate, or margins improve, or both. Investors aren’t expecting a recovery at AT&T Wireless (thus the opportunity). We covered this thesis in our recent Wireless Trends report HERE.
We didn’t upgrade the stock because the other businesses are struggling, and expectations for these businesses appear optimistic. DTV subscriber declines have accelerated to a startling 12% and will probably get worse from here. The prospect of stable EBITDA in the entertainment segment next year seems slim. Warner Media has been fine, but the warning signs are there too, with a steady trickle of talent leaving amid stories of frustration with AT&T management.
Elliott is striking at an interesting time. We think there are some opportunities to unlock value at AT&T, though they aren’t easy, and convincing AT&T to change course will take some work. We covered our thoughts on Elliott’s plan and on where we see opportunities in a recent comment HERE. We still aren’t ready to upgrade the stock, but we can see what Elliott is playing for.
We initiated on Intelsat this week with a Buy rating and $54 price target (+131%), based on our view that the C-Band auction will see much higher values than most investors realize (see initiation report HERE). One of the most common questions we have received is around what precedent transactions for similar spectrum in Europe tell us about the price the C-Band might fetch in the US. We follow up with some quick thoughts on the most recent European precedent, the 3.5GHz auction in Germany, in this brief note. Bottom line: the German auction value was very supportive of the US seeing $50BN in auction proceeds (the crux of our Intelsat Buy thesis and $54 target).
In this weekend update we discuss how Congress is the sleeping giant of the C-Band policy, what might cause it to wake up, and how investors may be misreading the timing window for such action. We also discuss why the potential impact of the states’ attorneys generals’ new activism against big tech likely hurts, instead of helps, settlement discussions in the T-Mobile/Sprint litigation (and preview an upcoming call on the trial). We close with a discussion of the three variables investors should be looking at in gaming out antitrust concerns related to any AT&T divestitures that might follow Elliot Management’s campaign to get AT&T to refocus and deconsolidate.
We have been arguing for a couple of years that investors have the 5G threat backwards. The opportunity for wireless carriers in the fixed broadband market is small and the threat to Cable often exaggerated. However, the opportunity for Cable companies entering wireless is much greater, and it is largely ignored by investors as an opportunity for Cable or as a threat to the Wireless carriers (we touched on it in our tome on Cable’s wireless economics HERE (now a little dated), and in a past global weekly review HERE, and Blair has commented on it HERE).
We have focused on this theme less in the last year because wireless subscriber growth had been slower than we expected for Cable, and the thesis wasn’t likely to get much traction until they picked up the pace. We even pulled the value of the wireless opportunity out of our price targets for Comcast (worth $5) and Charter (worth $98). We had never included it in our valuation for Altice because they hadn’t announced a strategy when we were focused on the issue, but a successful Wireless MVNO would be worth at least $3 for them (we have a detailed wireless model for each of them; let us know if you need them).
We noticed something in the new iPhone that renewed our excitement. It could pave the way for Cable to move beyond the MVNO, with a much better wireless product, and much better wireless economics.
Advance/Newhouse filed its most recent Charter ownership disclosure today, and with it we estimate that Charter’s share repurchases accelerated to $1.5BN in August, up from $0.7BN in July (and $0.3BN for each month in 2Q19). This is consistent with our view that share repurchases were likely to accelerate in the back half of 2019, as we estimated Charter had capacity to repurchase $7BN of stock in all of 2019, but had only repurchased $2BN through the first half of the year. Our estimate of $2.5BN in repurchases for Q3 may now look a touch conservative (QTD repurchases are already $2.2BN); however, for Charter to remain below leverage of 4.5x, we don’t see much room for repurchasing more than the $5BN we have estimated in repurchases in the second half of the year (additional repurchases in Q3 will therefore come out of our estimated repurchases in Q4).
We view the strong buybacks this quarter as a signal of management’s confidence in the business, particularly following a quarter where results disappointed investor expectations. Mgmt. expressed further confidence in the business at an investor conference today, where they see a long runway for broadband penetration growth, margin expansion, and declining capital intensity. Charter remains our top pick in US Cable.
Like Elliott, we see an opportunity to unlock value in AT&T’s wireless business. We highlighted early signs that this business may already be improving in our recent Wireless trends report (LINK). If AT&T can capitalize on their asset advantage in wireless, they ought to be able to recapture much of the share they have lost over the last few years. We see two challenges to Elliott’s plan. The first, is getting AT&T’s management team and board to shift its course. The second, is that outside of wireless the problems are more structural. It is not clear that these can be easily fixed with better management. Nevertheless, we see opportunities for value creation here too.
This week’s review focused on a few important reports that we are worried you may have missed (mostly published during the late-summer doldrums). We highlight the three or four reports that we have written for each region that touch upon the biggest controversies that will impact our sector in the months ahead. The list includes riveting accounts of the coming disruption in US wireless, the drivers of falling churn in US broadband, a new focus on infrastructure assets in Europe, and failing firms, new entrants and the impact of 5G in Asia.