Global Weekly Reviews

Who Is Going To Help Sprint And T-Mobile Get Their Deal Done?

According to press reports this week, there are three contenders. The WSJ pegs DISH as the front runner (LINK), with discussions also continuing with the cable companies. And Adderton, Boost’s founder, perhaps backed by private equity, has expressed interest (LINK). There was early talk that Amazon might be interested, but that seems to have faded.

It isn’t surprising that all these characters might want to take advantage of the situation to capture assets, or access to assets, at below market prices. New Street would be in the bidding too, if the companies (and the DOJ) would only willing to consider a layaway payment plan. They may not all solve the DOJ and the companies’ problems though.

In this edition of the weekly review we explore how each of these companies might stand to benefit from the process, what they might be looking for, and how their participation might help cure the competitive harms caused by the deal.

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5G: a debased currency, probably for the best

How does the new 5G smartphone in my hand relate to the sunlit visions of 5G that I hear from politicians, the media and lobbyists? If 5G is our portal to a future of smart cities, smart factories and even a smart society, how does that begin with this shiny new device that, if I’m lucky, can download data at close to 1Gbps? (ten times faster than my tired old 4G phone that now sits idle).

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Wholesaling isn’t a dirty word

Wholesaling isn’t a dirty word

Not many topics stir more fundamental debate within the sector than whether operators should voluntarily open up their networks to wholesale business or not. At New Street, we have ongoing debates between us in the office about whether operators really are better off doing it or not. There are so many variables at play: the opportunity of new high margin revenue streams – but what about the threat of losing retail customers, or causing damage to overall market pricing structure. Which one is bigger?

And we aren’t the only people debating this. In the past we believe this has been a hot topic at Vodafone, where the previous CEO, Vittorio Colao was a vocal advocate of not opening his networks up to wholesale business, unless done so at a suitably high rate. He also felt that by refusing access to MVNOs at low rates, this would lead to a behavioural change at the other MNOs and MVNOs might get shut out of the market, leading to broader market repair. Sadly, this turned out to be wishful thinking as other MNOs gladly saw more upside from our earlier equation. They didn’t see any incremental market damage and they picked up valuable high margin wholesale revenue from a competitor. Pure upside. As a sign of the controversy that this debate can cause, the new CEO now seems to be partially reversing this strategy and is now open to more wholesale opportunities. Better sweated assets should mean a better return for Vodafone, if retail markets don’t deteriorate as a result – see HERE for more details on this. In Europe, we certainly do think most of the retail damage has already been done.

This week, we explored HERE in this theme piece whether cable operators should now follow the MNOs and also offer their networks up to wholesale voluntarily. While for MNOs, we have always struggled with the angle that any network had clear differentiation which deserved a price premium and shouldn’t open itself up to competitors, this is more clear cut in cable where they clearly have network differentiation against the incumbents and have therefore been concerned about the potential damage to their retail franchise. At least for now.

With incumbents like BT and DT gradually beginning the upgrade path to FTTH, cable network speed is likely to become less of a differentiator. Furthermore, with sector ROCEs low and therefore less pressure likely from market wide retail broadband price cuts, the equation for a cable operator can now look more favourable – especially if they set the wholesale rate appropriately. Take Virgin Media – their current ARPU is £51 and we estimate their incremental cash conversion per average subscriber might be c.45% implying incremental cash profits of c.£22/ month. We assumed Virgin could offer a wholesale product at c.£20/ month, slightly undercutting BT’s rate to unbundlers and over a far wider area. So if all Virgin’s customers migrate over to wholesale, they would lose out (but not by much) – but then more importantly, if some of the other resellers can use their different brand messages to bring customers over to Virgin, it doesn’t take many migrations across before the model can be nicely profitable. We assumed 15% of the available competitor subscribers could migrate over, and Liberty can add 10% to their current equity value. Not bad for sweating the asset more aggressively. Vodafone should be able to achieve the same in Germany – so offers to United Internet and Sky could follow on from their initial offer to O2D.

This is all about voluntarily opening up the network. Where investors really have shown concern is when there is regulatory intervention – however, even this concern can often be overblown. As we saw in the US back in 2016 (see HERE), investors were concerned about cable networks being forced open by Democrat lawmakers, and there were similar concerns in Belgium that cost-plus regulation could lead to aggressive cuts in wholesale rates (see HERE). However, peak fear on these issues also proved to be greater buying opportunities. So, although forced wholesale can still bring with it risks – even those might be overstated, and where it is done voluntarily, assuming the appropriate rate is set, we believe European cable wholesale is something than investors should no longer shy away from.

Huawei: Escalation or a deal, but not life on the Entities List

Huawei: Escalation or a deal, but not life on the Entities List

The interventions by ARM and Google illustrate very clearly how very little Huawei’s dilemma has to do with the level of ‘chip inventories’ in its warehouses.  The global technology ecosystem is a web of continuous engagement between firms whose subsystems must function together through continuous change.  Interleaved intellectual property sharing is the lifeblood of this ecosystem.  The Entities List is choking off this lifeblood for Huawei.

What does this mean for Huawei?

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Could Vodafone Be AT&T’s Next Big Deal?

AT&T would tell you that they have created value over the last 20 years by doing deals.  We aren’t sure they have created value over the last 20 years, but if they have, it certainly isn’t through operating prowess.  So, sure…let’s say they have a special competence in acquiring things.

AT&T closed the Time Warner deal in June 2018, after a longer than expected fight.  We are coming up on the one-year anniversary, which means we are probably a year or so away from them looking for their next deal.

Finding deals is getting harder for AT&T as they swell in size and as their multiple swoons relative to assets they might like to buy.  They are hobbled by an enormous dividend and a core business that has been declining.  Whatever they buy has to be cheap.  Very cheap.  AT&T is trading at less than 10x earnings and FCF.

So, could Vodafone be next?

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Infrastructure Deal Bonanza: What It Means For Towers Globally

Nearly $20BN of telecom infrastructure changed hands this week through two large deals: Cellnex acquired all of Xavier Niel’s towers in Europe, and a consortium of private equity funds acquired Zayo in the US.  In this weekly review, we discuss the implications of these deals on the communications infrastructure landscape globally, and why they support our stance that SBAC is the most compelling opportunity within towers.

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What happens to Sprint if the deal is blocked?

The deal review doesn’t seem to be going Sprint’s way. The agencies could still approve the deal as it has been proposed. If they don’t, the companies could offer an alternative structure that passes muster. We offered thoughts on workable alternatives in a report we wrote two weeks ago (LINK). T-Mobile may prefer to walk away than accept the alternatives we suggested. It is worth considering what happens to Sprint if they end up in this situation. Continue reading “What happens to Sprint if the deal is blocked?”

Positively becalmed: Checking the pulse on European Telecoms

In December last year, we upgraded the European telecoms sector (LINK) to a more positive stance and four months on we revisit that call. While the market has been on fire since – up 16% largely backed by a change of view at the Federal Reserve helping reverse cyclicals’ underperformance in Q4 – the European telecoms sector is only up 1%. So, although the sector hasn’t done as well as the wider market in the last four months, let’s be grateful for small mercies – at least the European telecoms sector isn’t down – having seen declines of 12%, 4% and 8% in 2016, 2017 and 2018 respectively. We might be only 4 months into the year, but we already see this as a reversal of a historic trend.

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Cable’s Broadband Growth Set to Accelerate in The US

In our last weekly comment on the broadband market we sketched a decade-away view of a single connectivity market with whatever remains of today’s wireless and wired companies competing for the entire market. We argued that cable is best positioned for the fight given that they are attacking a market that is twice the size of the one they are defending, and they have time and infrastructure advantages. This week we focus on more proximate trends in the run up to the first set of results in what we believe will be a strong year for Cable broadband growth and for Cable equities. Continue reading “Cable’s Broadband Growth Set to Accelerate in The US”

T-Mobile / Sprint: Regulators And Investors May Be Making The Same Mistake

If the DOJ or state attorneys general really are preparing to sue to block the deal, we think they would be making a mistake. They would be missing the fact that the distribution of capacity across market participants could have a far bigger impact on competition and pricing than the number of participants. Prices are likely to increase if the deal is blocked, particularly for low income customers. Prices are more likely to stay low or head lower if the deal is approved.

Investors and some of the market participants appear to be making the same mistake. Verizon and AT&T are better off if the deal is blocked. These companies would face tougher competition if the deal is approved. In fact, it could be devastating for them. Verizon and AT&T should be fighting approval viciously (and perhaps they are, quietly).

We lay out the argument in this iteration of the Global Weekly review.

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