Last weekend AT&T (
T) announced an unprecedented deal to acquire T-Mobile US for $39 billion.
The deal will put the number 2 and 4 wireless providers together, and the combined subscriber base of more than 129 million will eclipse Verizon's (
VZ) count of 102 million and catapult the combined company into to the top spot among providers.
AT&T will have some regulatory hurdles to overcome, but if management can convince regulators that the expected $40 billion in cost savings will be passed along to consumers, then a few divestitures are likely to assuage any doubts. So, on the assumption that the deal flies, the question becomes:
Is there another telecom acquisition on the horizon?
Wireless penetration in the US is around 95%, and there are really only 8 (soon to be 7) companies that provide nearly all of that service: Verizon (VZ), AT&T (T), Sprint (
S), MetroPCS (
PCS), US Cellular (
USM), Leap Wireless (
LEAP), and Clearwire (
CLWR), although Clearwire is 54% owned by Sprint.
There are some other companies like Boost Mobile, Virgin Mobile, and TracFone that are not publicly traded which may come into the buyout blitz, but data on non-public companies is a little harder to come by. Additionally, there are one or two small providers, like Cincinnati Bell (CBB) and NTELOS Holdings (
NTLS), that have fewer than 600,000 subscribers and therefore are unlikely to come into play.
Rumors have swirled for Sprint, Metro, Leap, and Clearwire, so I wanted to take a look at some numbers to see if any of this makes sense.
The giants among us
The AT&T/T-Mobile merger clearly puts Sprint, which has been struggling since its Nextel acquisition in 2005, in a distant 3rd in subscriber base, according to data for the end of 2010. Assuming that AT&T is able to retain T-Mobile customers and reduce the churn rate, this could prove to be a nice deal for the old Ma Bell.
(Click on image to enlarge)
Verizon has been cited as a possible suitor for Sprint, but if you consider the Revenue per User (RPU), unless there are some serious synergies, it seems an unlikely match. On that metric alone, it would seem that US Cellular, with a sector leading $54.37 in RPU and a manageable churn rate, would be a more likely consideration.
Sprint has also been mentioned as a possible buyer, but the firm seems to be having some difficulties growing itself organically. In fact, 41% of its 2010 subscriber growth is likely to have come from its acquisition of iPCS in early 2010, which at the time had approximately 730,000 subscribers. Even if Sprint was capable of acquiring a fast grower like PCS, a mere 8.6 million additional subscribers would be a drop in the bucket compared to behemoths T and VZ.
If you take out that acquisition by Sprint, growth looks weak, but at least they didn't lose subscribers like T-Mobile and US Cellular did.
(Click on image to enlarge)
Metro PCS clearly leads the pack in subscriber growth. PCS has defined itself as a low cost provider, which is reflected in their RPU, and has concentrated on major metropolitan areas. The question that any potential acquirer might have about this firm is, "Will we be able to upsell?" The company's price points are what make it appealing to many of its subscribers, and an acquirer may have a tough road getting those subscribers to pay substantially more for similar services.
Nevertheless, PCS stock performance in the last year has blown away competitors, soaring more than 120%, and may continue to be a darling if it is able to penetrate other metropolitan areas with attractive end user pricing.
Clearwire is already 54% owned by Sprint, but focuses on data transmission, which accounts for it low RPU. Given its tiny subscriber base, the company's real offering to a potential suitor is its 4G technology.
(Click on image to enlarge)
What are the big guys doing?
With all the hype, I was curious what the big shareholders of these companies were doing; you can find this out through 13F reports submitted to the SEC. An institutional investor with discretion over $100 million or more must make this change of position filing.
(Click on image to enlarge)
TA Associates has owned a piece of PCS since before it went public in 2007, at one point owning around 30 million shares. They began lightening up on their position in the first quarter of 2010, and disposed of approximately 10 million shares last year. From other forms filed so far in 2011, TA Associates has sold an additional 4-5 million so far, bringing their total down to around 15 million. Other buyers among the top 5 holders offset some of these sales. Additionally, these are scheduled sales pursuant to a 10b5-1 plan established in December of last year.
Gamco Investors, the largest holder of USM, more than doubled its position in the final quarter of 2010, bringing its total holding to 8.2 million shares.
The decline in holdings among the top 5 in LEAP was driven by a complete liquidation of 3.75 million shares by Thornburg Investments. Thornburg was the number 4 holder of the stock at the end of the 3rd quarter last year.
CLWR's top holder, FMR LLC, may have sold nearly 2 million shares in the 4th quarter of 2010, but still holds in excess of 41 million shares. The second and third top holders maintained their positions over the quarter, and the fourth and fifth in line added to their positions.
The Bottom Line
There are many more factors that can be analyzed to evaluate the possibility of another wireless merger or acquisition in the US, but based on those considered here, USM, with the highest RPU and a dedicated large holder, looks like it might have some appeal as a corporate target or an LBO.
Sprint seems like dead money, but crazier things have happened.
PCS has clearly developed a growth niche, and has been the top stock over the last 12 months. With that in mind, if I were management I might want to go it alone to unlock even more shareholder value rather than be sucked up by Sprint, which seems to have some serious execution problems.
CLWR and LEAP are wild cards -- both firms have Debt/Equity ratios in excess of 3 and little or no expected earnings, suggesting that stock holders may not get the best deal in an acquisition, since any buyer would have to contend with the debt load on top of paying a premium for the company.
Over the next several weeks, these will be the stocks to watch if the domestic wireless game is going to produce any additional M&A action.