Quick Hits

Details Of C-Band Order Positive For Intelsat

Press reporting suggests that the C-Band Order will come at the December 12th FCC Open meeting (with a draft made available 3 weeks earlier). The report suggests that the Order would allow for 280MHz of C-Band spectrum to be sold via a private auction in 1H20 (though this could potentially come in two auctions). In addition, the auction is unlikely to include combinatorial bidding. Overall, we find the report supportive of our Intelsat Buy thesis (see initiation report HERE) as well as our policy reporting on the likely timing, amount of spectrum and likely party holding the auction.

The most important data point is that the spectrum will be sold via private auction; this increases the likelihood of a low government cut of the overall proceeds (our base case is 20%). In addition, a private auction lowers the odds of rules that would artificially undermine bidding tension (such as overly proscriptive bidding caps). Our Intelsat Buy case rests on the view that 1) an auction of the C-Band will raise $50BN in proceeds, and 2) that the government cut will be around or below our base case of 20%. On the heels of press reporting on the details of the Order, we continue to believe in both drivers of our thesis.

Charter Share Repurchases Ahead Of Expectations (Again)

Advance/Newhouse (A/N) filed its latest Charter ownership disclosure this week, and our analysis suggests that share repurchases in September were $0.9BN, bringing total repurchases for Q3 to $3.1BN ($0.6BN higher than our prior estimate).  This would be a material acceleration from the $1.0BN they repurchased in each of the first two quarters of the year.  We now believe they will end the quarter levered at 4.47x, up from 4.40x in Q2 and 4.43x in Q1. Charter’s target leverage range is 4.0-4.5x – if they remain at 4.47x, we estimate they could repurchase up to $2.7BN in Q4, bringing total share repurchases for the year to $7.9BN.  We are taking a slightly more measured approach and increasing our FY buyback estimate from $7.0BN to $7.7BN, implying $2.5BN in buybacks in Q4.

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AT&T Sells Caribbean Mobile Assets to Lilac; Confirms Share Repurchases for 4Q19

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.

Packet CEO Lunch Takeaways

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.

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Comments From FCC Commissioners Positive For Intelsat

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.

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Get ‘er Done

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.

OnGo CBRS Commercial Service Launch Event Takeaways

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.

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Quick Thoughts On Congressional Risk To Intelsat

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.

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Opportunities at AT&T…?

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.

Most Recent European Comp Suggests $50BN In US C-Band Auction Proceeds

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).

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