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Verizon cools on Comcast merger, for this week at least

A possible merger between Verizon and Comcast has been rumoured for a long time now, and every development seems to send opinion veering one way or the other.

The outcome of the recent 600 MHz incentive auction raised new speculation that, once the ‘quiet period’ surrounding the process was over, the telco would make its move. That was based on the fact that Verizon sat back and did not buy any spectrum, while Comcast was a top three bidder. Pundits thought that signified plans to pool resources at some stage before the spectrum was activated.

Then Verizon announced a $1bn-plus deal to deploy fiber from Corning (see separate item), which sent opinion back the other way. Clearly the cablecos’ fiber would not be sufficiently dense to support 5G, the argument went – even though Comcast said recently that its network was “perfectly aligned” to 5G requirements – and the telco would do better building out by itself, relying more on third party and dark fiber, and acquiring specialists like XO.

Verizon itself seems to be cooling on Comcast, though that may be another pre-negotiating tactic too. CEO Lowell McAdam told Bloomberg last week that it was interested in building its content and media businesses further, and would be willing to discuss a merger with Disney or CBS, to add to its existing purchases of AOL and Yahoo.

McAdam did say that, if Comcast CEO Brian Roberts “came knocking on the door, I’d have a discussion with him about it. But I’d also tell you there isn’t much that I wouldn’t have a discussion around if somebody came and said, ‘Here’s a compelling reason why we ought to put the businesses together’.”

But he did not sound enthused by the prospect when he told CNBC, in another interview: “As we’ve looked at companies around the US, there’s nobody building to the architecture that we’re talking about. From a fiber perspective, nobody, whether you’re a fiber company or a cable company, you don’t have the architecture that we’re talking about today.”

Meanwhile, Sprint may also join the revolving door of US telco M&A again. Its current parent, Softbank of Japan, has been said to be willing to put Sprint on the market, possibly to make a bid for the faster growing T-Mobile USA (Softbank backed away from a previous plan to acquire TMO and merge it with Sprint, in the face of probable regulatory blocks).

Now that the 600 MHz auction is over, negotiations on both fronts could start up again, and Sprint has one important – and probably undervalued – dowry, its plentiful supply of 2.5 GHz spectrum. As operators start to emphasize capacity more than coverage in their network expansion programs, and look ahead to 5G – for which Sprint has described 2.5 GHz as an ideal band – these airwaves will gain in value.

That would help Softbank drive up the price for the right purchaser, but the Japanese company reportedly still sees TMO as a more attractive subsidiary. Sprint has good assets, but has repeatedly failed to translate those into significant commercial advantage, and has seen its third place in the MNO rankings usurped by TMO with its disruptive Uncarrier subscriber deals, zero-rated video and unlimited data offerings. And while Sprint has had ambitious network architecture plans, but often failed to realize them on time, TMO has had to make do with far fewer natural assets in terms of spectrum and infrastructure, but has created a highly efficient LTE network. Indeed, it claims that this now offers the best speeds in the US, because the older systems of Verizon and AT&T are now creaking under the weight of re-introducing unlimited data plans – a move forced by TMO’s Uncarrier success.

With billions of debt coming due soon, and further network investments required, the timing for Softbank to offload Sprint seems to be looming, especially as the Japanese parent could otherwise face the prospect of having to bail its US arm out, which would go down badly with shareholders. Although Sprint has greatly improved liquidity and cost efficiency, debt ratings agency Moody’s reckons its cash will last only about 18 months. About $11bn of debt will mature between now and 2020, $1.3bn of that in 2017, and it will make $2bn in interest payments alone this year.

“The ticking clock for Sprint is debt maturity,” Craig Moffett, an analyst with MoffettNathanson, said. Some of Sprint’s debt uses some of its spectrum assets as collateral.

That ticking clock means some analysts see few buyers for Sprint, and believe Softbank will be forced to merge it with TMO rather than offload it. This might be less likely to be  blocked than in 2014, because of a more laisser-faire government and because there are more wireless players than there were then, including the powerful Comcast MVNO-enabled launch, plus Dish with its patchwork of airwaves.

But others believe a cableco would step up for Sprint’s spectrum, if they could negotiate the right terms around the debt issue. Comcast and Charter, in particular, are talking up their wireless, 5G and quad play plans, and Comcast acquired 600 MHz licences itself in the recent auction. Another possible bidder might be Dish, whose wireless plans remain shrouded in mystery, and which tried to buy Sprint in 2013, only to be outwitted by Softbank.

That’s if, of course, Verizon doesn’t swoop for Dish, another deal which has been periodically rumoured, especially after AT&T acquired the other US satellite TV player, DirecTV. And there is still the potential for a Verizon-Charter deal bubbling under, as was widely reported at the start of this year. Meanwhile, the latest quarterly results from Verizon show that its traditional businesses are still under pressure, and McAdam seems to be floundering, casting around for his next move, but really not knowing what that should be.

Those Wall Street analysts which favor a media move like AT&T’s think Verizon should buy Dish and perhaps then Viacom, rather than trying to buy Charter or making smaller moves, like the Yahoo deal, which take it into advertising and the internet, but not into content.
A merger with Charter would give Verizon access to close on 21m fixed line customers and all the bandwidth that goes with that, which could reduce capex for its own fixed line network, and perhaps for fixed 5G. It would dilute Verizon shareholders significantly, but it would help address Verizon’s woeful broadband business, as seen in its 2016 results statements – and that will be essential for 5G as well as the survival of the fixed-line business and the ability to host OTT players.

Verizon’s broadband strategy is in tatters – its 2016 figures showed it was down to just 7m broadband lines. Its plan for a long time has been to have the best cellular network, substantially ahead of AT&T’s network and of higher quality and greater reach than those of T-Mobile USA and Sprint. It has largely achieved that for at least a decade, but now the advantage is running out, and no longer translating into crucial leadership in net subscriber additions, nor into the ability to charge premium fees.

Acquiring a company for its landlines would represent a reversal of strategy which is becoming common in developed telecoms markets. Verizon has, in recent years, been divesting landline assets and positioned itself as a wireless-first carrier, but now growth depends on supporting content and broadband access over any kind of line and screen, and having a converged fixed/mobile infrastructure and service plan. So while Verizon has been selling landlines, primarily to Fairpoint Communications and Frontier Communications, since 2007. A cable purchase would not only reflect that international push towards convergence – also seen in Vodafone’s M&A strategy, for instance – but the challenges of pursuing growth through advertising and digital media, as Verizon was doing with its AOL deal.

Charter could swing the Verizon pendulum back towards the actual network, and provide it with the WiFi strategy it lacks. But like Comcast, it would not bring a readymade 5G-suitable backhaul and fronthaul network. “In our view, legacy cable plant, which would require significant investment to service a 5G platform, isn’t a plug-and-play solution,” wrote Jefferies analyst Mike McCormack in a research note.

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