Dealtalk: U.S. telecoms industry set for M&A negotiations frenzy

Liberty Broadband

17/04/2017 12:00

(For more Reuters DEALTALKS, click on  DEALTALK/ ) 
    By Liana B. Baker and Anjali Athavaley 
    April 17 (Reuters) - In 10 days, the U.S. Federal 
Communications Commission (FCC) will lift a ban on telecoms 
companies engaging in merger talks, and Wall Street is betting 
on T-Mobile US Inc  TMUS.O , Sprint Corp  S.N  and Dish Network 
Corp  DISH.O  to be the first ones out of the gate. 
    Shares of these companies have soared over the past 12 
months on expectations of deal talks, and are trading at up to 
31 times forward earnings, versus the S&P 500 telecom services 
index's  .5SP50  18 times. 
    The rich valuations could discourage acquirers, who also 
have to assume the risk that antitrust regulators may look 
askance at more consolidation in the sector after a wave of 
mergers in recent years, investment bankers and industry experts 
say.    
    "It seems as though valuations have already jumped to a near 
certainty a deal will be announced and approved. You have to ask 
yourself whether T-Mobile is going to be as eager to do a deal 
as Sprint," said Craig Moffett, an analyst at MoffettNathanson. 
    Sprint shares have risen 142 percent in the last 12 months, 
and T-Mobile shares have risen 65 percent. Both companies 
declined to comment on the possibility of a merger or how 
valuation considerations could be a factor. 
    Investors have long expected a deal between T-Mobile and 
Sprint, the third- and fourth-largest U.S. wireless service 
providers, anticipating cost cuts and other synergies in the 
range of $6 billion to $10 billion.  
    Reuters reported in February that Sprint's controlling 
shareholder, SoftBank Group Corp  9984.T , was positioning 
itself for deal talks with T-Mobile's top shareholder, Deutsche 
Telekom AG  DTEGn.DE , once a U.S. government auction of 
airwaves spectrum ended.  urn:newsml:reuters.com:*:nL1N1G21FL 
    Companies participating in the auction, which started last 
May, were banned from engaging in merger talks. The end of the 
auction last Thursday meant the FCC will lift the ban on April 
27, when down payments are due from auction winners. 
 urn:newsml:reuters.com:*:nL1N1HL196  
    T-Mobile and satellite TV provider Dish won the bulk of the 
spectrum, making them more attractive M&A targets, analysts 
said. T-Mobile now has more power to improve its network and 
support unlimited data packages for customers. Its financial 
results have also strengthened since it last held merger talks 
with Sprint in 2014. 
 
    DISH TO BUILD NETWORK 
    Controlled by Chairman and CEO Charlie Ergen, Dish faces an 
FCC deadline to use the spectrum by 2021 to build its first 
wireless network. Some investors say Ergen will likely want a 
partner to help share the cost of the investment, even though he 
has said the company can build the network by itself. 
    Analysts have viewed Dish as a likely target for Verizon 
Communications Inc  VZ.N , since Dish would bring spectrum and 
its Internet TV business, Sling TV to the telecoms giant. Dish 
and Verizon declined to comment. 
    Verizon Chief Executive Lowell McAdam told investors in 
December that a deal with cable operator Charter Communications 
Inc  CHTR.O  would make "industrial sense," igniting takeover 
speculation.   
    With Charter, Verizon would gain a fiber and cable network 
across 49 million homes that could boost its wired network ahead 
of the advent of 5G wireless technology. Verizon and Charter 
declined to comment. 
    Charter's controlling shareholder, billionaire John Malone's 
Liberty Broadband Corp  LBDR.O , could be an obstacle to any 
deal. His lieutenant, Liberty Broadband Chief Executive Greg 
Maffei, said in March that "the hurdle around M&A is very high, 
because we are very enthused about our own plans." 
    The price tag could also be an issue. Charter has a market 
capitalization of $101 billion and trades at 53 times forward 
earning estimates, far more expensive than Verizon's 13 times. 
    "One of our principle concerns is that a deal would come 
with a high price target, and thus, be materially dilutive," 
Barclays analyst Kannan Venkateshwar wrote in a research note. 
    Charter's proxy statement to its shareholders shows that CEO 
Tom Rutledge has compensation incentives to take Charter's share 
price to more than $564. The stock closed last week at $330. 
 
    FCC STANCE UNCLEAR 
    The stance of FCC Chairman Ajit Pai on these mergers is not 
clear. Pai is seen as a friend to major telecommunications 
companies, but price wars between Sprint and T-Mobile have 
helped to lower wireless prices for consumers so regulators may 
be reluctant to remove that competition.  
    It could be easier for regulators if cable and media group 
Comcast Corp  CMCSA.O  wanted to buy a wireless company as that 
would preserve four major carriers in the market, analysts said. 
    Such a deal would be the most complementary for T-Mobile, 
according to Morningstar analyst Alex Zhao, since it would unite 
Comcast's wired network with T-Mobile's spectrum. 
    However, Comcast seemed to be forging ahead with a 
standalone wireless strategy, launching a mobile service and an 
unlimited data plan earlier this month using Verizon's airwaves 
and buying $1.7 billion in the spectrum auction.  urn:newsml:reuters.com:*:nL2N1HE0SB    
  
    Comcast declined to comment. 
 
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Investors bet on deals in cable & wireless stocks    http://tmsnrt.rs/2p1JLY3 
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 (Reporting by Liana B. Baker in San Francisco and Anjali 
Athavaley in New York; Additional reporting by Sinead Carew in 
New York; Editing by Greg Roumeliotis and Tiffany Wu) 
 ((liana.baker@thomsonreuters.com; 4156772537; Reuters 
Messaging: liana.baker@thomsonreuters.com@reuters.net)) 
 
Keywords: USA TELECOMS/M&A