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15 August 2017

If Altice fails, what are the other options for the US MNOs?

Most of the current speculation focuses on Altice and Charter, and the potential involvement of Sprint or possibly TMO. But there are many other permutations also being discussed:

Comcast could afford to buy any of the other MNOs in the US, but it has seen the risk of holding large amounts of debt when it acquired AT&T Broadband to double its size in 2001, and once again after it acquired NBC-Universal in 2013 for a total of $23bn in two transactions. In both cases there it knew what it was buying, in this case it will know far less.

Speculation about Dish and Sprint has been rumbling for years, even after Dish lost the battle to acquire Sprint, to Softbank. There are issues with this deal however despite some clear synergies. Dish has not got any fixed network to bring to the party and Sprint will need that for 5G backhaul. Sprint has never taken any initiative to bring video over its phones lines, apart from signing up an arms’ length deal with MobiTV. Also, Dish’s greatest asset for a wireless partner is its spectrum, but Sprint is the MNO which least needs more spectrum.

Sprint’s best chance of a deal is a merger with T-Mobile USA, with T-Mobile management ending up running the show and Deutsche Telekom the major shareholder. However, they would be taking on 5G without a significant fixed line capability so the merger only makes real sense if Comcast or Charter or Altice (or all of them) agrees to pledge their significant fixed line capability to the cause. For instance, if Altice is not the kingmaker, there could be a multiway group of minority interests – TMO could buy Sprint with money from Comcast and Charter and others, on the understanding that it would become their MNO partner.

Charter is not big enough to do a major deal on its own, except with Sprint and it has rejected that (though reports indicate Son will not accept defeat lightly). But an alternative to the Altice/Sprint/TMO scenario is that Big Cable teams up with Verizon. This is something our sister service, Faultline Online Reporter, which analyzes digital video markets on a weekly basis, has been predicting for some time. For instance, Comcast, Charter and Altice could each buy stakes of 25% to 30% in Verizon (the rest remaining public), and all share the cellular network to support their quad plays. It would still have regulatory issues, but perhaps not insurmountable. Selling off the Verizon fixed line network would be achievable; and since each of the cable operators would only have a shareholder relationship, there might not be a perceived concentration of broadband, enough to worry the Justice Department.

Citigroup analyst Jason Bazinet was on a similar tack recently in a research note, suggesting that Comcast should put in a $215bn offer for Verizon. He argues that Comcast already has a relationship with Verizon, and in the event Sprint and TMO merge, a VZW deal would make more sense. Bazinet points out that Verizon’s equity has fallen 17% this year and its CEO Lowell McAdam has been quoted in the press hinting at merger possibilities with Disney, CBS or Comcast.

Some analysts are still banging the drum for a Sprint/Dish merger, though most admit it is now unlikely to happen. After the latest rumors that Son was pursuing Dish, analysts at MoffettNathanson argued in a client note that the marriage would make sense for Dish, which continues to see both its subscriber base and total service revenues wane. But it does little to help Sprint, which controls an impressive portfolio of 2.5 GHz spectrum but faces serious financial challenges as it gradually deploys service on those airwaves.

Craig Moffett of MoffettNathanson wrote: “To be sure, given Dish’s rapidly deteriorating financial position, we can understand why Dish would be interested. And a deal with Sprint would actually have strategic merit for Dish, which would secure infrastructure that would help reduce the cost of deploying its spectrum. Unfortunately, Dish would bring no benefit to Sprint whatsoever—Sprint already has more spectrum than it knows what to do with, and Dish’s rapidly declining EBITDA would hurt Sprint’s liquidity position more than it would help.”