SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

AT&T swings for the fences – winners and losers

I was working out on the treadmill. Where were you? Like a

President getting shot or 9/11, you will always remember where you
were when you first heard the news. In this case, I’m of course
referring to the move AT&T made by agreeing to buy T-Mobile for
$39 billion.
We expect
withering scrutiny Given that a company as big as AT&T has tentacles that reach
from the throughout the telecommunications ecosystem, and since today is
Department of a very different day from when Ma Bell was first broken up (and
Justice … and then partially recombined like the liquid metal robot from Terminator
from the Federal 2), we wanted to join the chorus of analysts weighing in on this
Communications monumental transaction.
Commission
First, let’s consider AT&T. We have always considered an AT&T/T-
Mobile transaction as very unlikely - as we penned in our January
2010 newsletter article, “While it [AT&T] would make a good fit with
T-Mobile, the sheer scale of the transaction would make it very
likely to attract regulatory attention.” (See our January 2010 article
“Next Moves in the Wireless Endgame” for much more on this and
other potential transactions.) On a pro forma, post transaction
basis, AT&T and Verizon would control 80% of the subscribers in
the United States. The combined AT&T/T-Mobile would likewise
control a vast spectrum portfolio of nearly 50 billion MHz-POPs –
about twice as much as Verizon! We expect withering scrutiny from
the Department of Justice on the market power effects of the
the Federal
former, and from the Federal Communications Commission on the
government’s
latter. In the case of the FCC, consider that in the Skyterra take
desire to
private transaction rulemaking they specifically called out AT&T and
accelerate mobile
Verizon for limits on the amount of traffic they were allowed on the
broadband
system, all in the name of preserving competition. No wonder AT&T
penetration … may
expects the process to take a year, or perhaps more.
make some
previously
But, as we said above this is a different day and the Federal
“impossible”
government’s desire to accelerate mobile broadband penetration
transactions quite
and the tens of billions of dollars of required investment may make
conceivable
some previously “impossible” transactions quite conceivable. So, at
least for the sake of discussion, what if they do get it approved?
Then what?
 SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

For AT&T, as they outlined so well in their release, the combination

makes a lot of sense. AT&T and T-Mobile use the same basic
technology for their 3G networks, which will help ease integration
issues. In contrast, all the other independent cellular carriers use
the same CDMA standard that Verizon and Sprint use – making
them difficult for AT&T to digest. In addition, T-Mobile controls
substantial traffic that can be backhauled over AT&T’s terrestrial
network, leading to substantial savings through vertical integration.
Consolidating tower equipment offers additional capex and opex
savings.

From T-Mobile’s perspective, it’s heads we win and tails we win

…even if the deal
anyway. If the deal is approved, T-Mobile gets a rich (7x EBITDA)
founders on
valuation for its shareholder – not bad considering that T-Mobile
regulatory shoals,
was considered one of the weaker players heretofore. But, given
T-Mobile wins
the regulatory risk, T-Mobile insisted on some fairly rich breakup
anyway – with a
provisions ($3 billion plus a measure of 1.4 GHz spectrum) as a
very big pile of
precondition to accepting AT&T’s embrace. So, even if the deal
cash plus the
founders on regulatory shoals, T-Mobile wins anyway – with a very
spectrum it needs
big pile of cash plus the spectrum it needs to roll out real 4G
to roll out real 4G
services (as opposed to the HSPA service they’re currently
services
pawning off on subscribers as 4G – but that’s another story…).

For the other carriers, a supercharged AT&T/T-Mobile can’t be

good news. With its strong brand, substantial financial heft, the
new iPhone and the best spectrum portfolio of the majors, Verizon
is perhaps best positioned to receive the onslaught. Sprint is
entirely another matter. While the carrier has been improving its
results of late, it still remains a lower margin outfit with a highly
… if AT&T can get levered balance sheet. With its constrained capital structure, Sprint
approval for T- is poorly equipped to compete with Verizon and AT&T on network
Mobile, then the upgrades and thus has relied on its majority owned (though not
relatively smaller controlled, due to the voting stock structure) Clearwire affiliate to do
Verizon certainly is the heavy lifting to build out a 4G network.
going to have a
strong case that it Unfortunately, Clearwire itself is rapidly depleting its cash reserves.
should be To date, Clearwire has supplemented Sprint’s capital with strategic
permitted to buy investments from cable companies looking for a quadruple play
up one or more of (e.g. Comcast, Time Warner) and hardware companies (i.e. Intel)
these looking to bolster the WiMax standard – and even Google. Given
independents the weakening position of WiMax vs. LTE, we think that Intel is
likely to refrain from further investment, and given the poor take-up
of the rebranded Clearwire service with cable customers, that too
seems an unlikely source of funding. If approved, this deal also
 SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

effectively eliminates T-Mobile as a Clearwire customer. Thus, we

think (despite their protests to the contrary) the most likely funding
source for Clearwire is Sprint – which is likely to drive a pretty hard
bargain. Even so, this is going to constrain Sprint’s ability to do
acquisitions of the remaining carriers.

And, speaking of the remaining carriers (i.e. MetroPCS, Leap

Wireless, U.S. Cellular and Cellular South), how does this affect
their fortunes? Here the sword has two edges – as noted above
AT&T is going to be a tougher competitor for all of them if this deal
succeeds. But, if AT&T can get approval for T-Mobile, then the
relatively smaller Verizon certainly is going to have a strong case
that it should be permitted to buy up one or more of these
independents – all of which use the same CDMA standard that
Verizon (and Sprint) use. Thus, we were not surprised to see
positive responses in the stock prices for these carriers.

Going a bit deeper into the ecosystem, what about LightSquared?

Here the news is bad all around – combining AT&T and T-Mobile
will allow the respective networks to share spectrum, reducing their
overall need. If the deal fails, T-Mobile (which has the weakest
spectrum portfolio of the big four) gets a pile of spectrum from
AT&T which should go far towards addressing its expansion needs,
making LightSquared redundant. Granted, in this case there is a
potential silver lining for LightSquared from AT&T’s correspondingly
reduced spectrum portfolio, but even there the FCC’s restrictions
Consolidation of on the amount of capacity that LightSquared is allowed to provide
the networks to AT&T/Verizon limit the upside. Finally, regardless of what
reduces demand happens over the next year or so that the deal is in limbo, both
for their services, AT&T and T-Mobile are going to pretty much be self absorbed and
vertically unlikely to do anything with LightSquared – just when LightSquared
integrating T- is in the market to fund their buildout. Thank heavens LightSquared
Mobile’s backhaul was able to announce their deal with Leap Wireless or it would
into AT&T’s have been a dark week indeed.
terrestrial network
reduces their need Elsewhere in the ecosystem, the tower companies and other
for alternative spectrum/backhaul plays such as Crown Castle, Fibertower,
backhaul solutions Nextwave and others all appear to be losers, at least for as long as
the deal is pending. Consolidation of the networks reduces demand
for their services, vertically integrating T-Mobile’s backhaul into
AT&T’s terrestrial network reduces their need for alternative
backhaul solutions and consolidation of their customer increases its
relative market power when approaching them for services. While
the tower companies are well funded and still sport impressive
SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

valuation multiples, some of these smaller players are likely to feel

significant pain as they continue to seek funding.

With the epic Comcast/NBC Universal transaction now in the

history books, it’s exciting to see a deal of similar scale on the
docket. As we’ve discussed above, a lot of people (and smaller
deals) are going to be hanging on what happens next.

By John Stone
Near Earth LLC
SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

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