Weekly Telecom Notes: Verizon-Vodafone Deal, AT&T’s LTE Ramp Up And Sprint’s Growth Concerns

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The past week saw quite a few developments in the telecom industry. Fresh rumors emerged about Verizon (NYSE:VZ) getting ready to buy out Vodafone’s stake in their wireless JV at a 30% higher price than earlier anticipated. AT&T (NYSE:T) added 5 new markets to its expanding LTE footprint, taking its total tally to 370 and boosting its population coverage to 225 million. Sprint (NYSE:S) meanwhile faces subscriber growth concerns in the absence of its iDEN network, which has been a steady contributor of subscribers to the CDMA platform in recent quarters.

Verizon

Fresh speculation regarding Verizon buying out Vodafone’s stake in their wireless joint venture have emerged once again, sending shares in Vodafone up by more than 8% in trading Thursday. Verizon is however rumored to be paying as much as $130 billion for Verizon’s non-controlling stake – almost 30% more than what was previously assumed in what could likely be a desperate move to seal the deal before interest rates rise any further. Average A-rated corporate bond yields have increased by almost 80 basis points in the past few months on heightened speculation about the Fed’s tapering program.

While Verizon has long harbored ambitions of owning Verizon Wireless completely, the increased payout coupled with the high interest rate of debt financing means that the value addition to Verizon is likely to be lower than previously anticipated. Still, there seems to be enough value to be captured from the capital structure change that would result from financing the move with cheap debt. (see Verizon Could Unlock As Much As $12 Billion With Vodafone Deal)

AT&T

With Verizon racing away with its LTE expansion plans, AT&T is aggressively ramping up its own LTE roll-out. The second largest wireless carrier in the U.S. recently announced the addition of 5 new markets to its growing LTE coverage, taking its total tally to 370 and boosting its population coverage to 225 million. While this still leaves AT&T some way behind Verizon, which has already covered almost 300 million Americans with its 4G LTE network, the carrier has come a long way since the same time last year when it had less than half the current LTE coverage. By the end of 2013, the carrier plans to reach 270 million Americans with its LTE network; so Verizon’s early LTE lead shouldn’t be a concern to AT&T’s shareholders for long.

However,  AT&T has lost postpaid market share to Verizon over the past year, which made it splurge on subsidies and promotions to attract subscribers last quarter. While the promotion drive was successful in drawing as many as 551,000 net postpaid customers in Q2, margins fell by 300 basis points over the same period last year. AT&T may be able to recoup its expenses through rising data usage going forward, but the margin compression shows how big a differentiator LTE has proved to be in a saturated market. As LTE adoption grows and the technology gradually becomes a network standard, AT&T is looking to catch up with Verizon’s far wider LTE network in both coverage and quality as soon as possible. (see Sprint Faces Subscriber Growth Concerns After iDEN Shutdown)

Sprint

Sprint’s shares have run up by almost 20% since it announced its Q2 earnings last month, but questions surrounding its subscriber growth still remain. The third largest wireless carrier in the U.S. recently shut down its outdated iDEN network, which has been a big contributor to Sprint’s core CDMA platform net-adds in a saturated market. Last quarter, for example, the iDEN recaptures as well as the acquisition of subscribers from the U.S. Cellular deal helped Sprint add about 194,000 postpaid subscribers to its core CDMA platform. Excluding these non-recurring adds, Sprint would have reported a net loss of upwards of 200,000 postpaid CDMA subscribers in Q2. Going forward, with the iDEN network shut down and the U.S. wireless market nearing saturation, Sprint will find it even tougher to find new subscribers given its lagging 4G LTE coverage compared to rivals Verizon and AT&T. (see Sprint Faces Subscriber Growth Concerns After iDEN Shutdown)

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