In case you hadn’t heard, AT&T (T) on Sunday afternoon said that it would acquire Deutsche Telekom’s (DT) T-Mobile USA unit for $39 billion in cash and stock, vaulting the company past Verizon Communications (VZ) as the largest U.S. Wireless carrier and creating what AT&T said would be “straightforward synnergies.”
AT&T would have 130 million subscribers under the deal, versus 100 million for Verizon, out of a U.S. total of 293 million.
The deal, consisting of $25 billion in cash and the rest in stock, will be paid with existing cash and new debt, AT&T said. The company said it has an 18-month commitment for a one-year unsecured bridge term facility underwritten by J.P. Morgan for $20 billion. AT&T isn’t taking on any debt from T-Mobile, it said. The dividend will be supported, it said. Deutsche Telekom will get 8.5% ownership of the new entity. The deal is expected to take a year to close.
The deal will add to AT&T’s profit in the third year after it closes, based on $3 billion a year in synnergies, AT&T said, and on a combined basis, the two companies would have had $80 billion in revenue last year, up from AT&T’s reported $58.5 billion.
AT&T will hold a conference call at 8 am, Eastern time today to discuss the deal. You can listen in on (888) 517-2464 in the U.S., or (630) 827-6816 outside the U.S., using passcode 8442095.
A couple things were obvious in the Street’s initial response: it comes as quite a surprise, as most people figure the hurdles for regulatory approval are quite high. And it puts Sprint-Nextel (S) now in a tricky spot, as rumors in recent weeks had suggested a deal with Deutsche or a T-Mobile might be a good fit to boost the company’s competitive position. That prospect is now gone.
Jamie Townshend, Town Hall Investment Research: The deal is positive for AT&T, but the more interesting question is what it does to the competition. Verizon may consider a similar move, with “Sprint, MetroPCS (PCS), and Leap Wireless (LEAP) the most likely candidates, though such deals would come with “a variety of issues” for Verizon that make them far from a certainty. And, “We believe that Sprint in particular is at risk as they have lost a potential merger partner and gained an even more formidable competitor,” while Clearwire’s (CLWR) “predicament has gotten worse, in our view. While some may assume that an acquisition of Sprint by Verizon would eventually include Clearwire, we believe that it is an unlikely scenario. In the meantime, T-Mobile can no longer be viewed as a potential wholesale customer of Clearwire and we continue to believe that Sprint is moving away from a longer term commitment to Clearwire and its WiMAX network.”
Greg Miller, Collins Stewart: Reiterates a Neutral rating on AT&T. “With the proposed merger that would result in AT&T to have 129 million wireless subscribers, or roughly 43% of US total, we expect the most obvious call by everyone will be that the deal is likely to face stiff FCC and maybe even DOJ opposition.” Less competition over the long term will be a net positive for Verizon shareholders, he writes. “Although the announcement clearly pushes Sprint and Clearwire closer together [...] we also note that it likely eliminates a likely wholesale customer or even purchaser of the 20Mhz of Clearwire spectrum that had actively been shopped. For LightSquared, it simply eliminates the single most likely anchor tenant for its yet-to-be built wireless network which could jeopardize its entire business model.” This is a definite negative for the companies that own towers, including American Tower (AMT), Crown Castle International (CCI), and SBA Communications (SBAC), as there will be a combined 40,000 tower sites that T investors will expect to be pared down.
Jonathan Atkins, RBC Capital: The stiff regulatory challenge may be eased somewhat by the fact that the big telecom workers’ union, the Communications Workers of America, came out in favor of the deal Sunday. The value of 7.1 times projected Ebitda put on the deal makes Sprint look more attractive, though there seems little prospect Sprint will get any bid unless Verizon decides it wants to create regulatory headaches for AT&T by pushing matters and buying Sprint. “Deutsche Telekom, if the deal is approved, would benefit from a higher valuation than it currently receives for TMUSA and enhanced flexibility for shareholder remuneration,” writes Atkind, while “AT&T shares may face some pressure on regulatory approval.”
Clay Moran, The Benchmark Co.: Reiterates buy ratings on the three tower stocks, despite the obvious negatives of consolidations. It’s going to take a year for the deal to get done and the tower stocks are reasonably cheap, he writes. “Tower companies have yet to disclose the percentage of revenue at risk due to possible site decommissioning,” he observes, but anyway, it’s likely to take a long time. “Longer-term, fewer networks would be unfortunate for towers. But overall network usage is the primary driver of demand for tower space and this acquisition will not impact growing consumer demand for mobile communications.”
Article courtesy of Tech Trader Daily
Deutsche Telekom is apparently in talks with Sprint to sell its T-Mobile USA division, sources in the know