AT&T (NYSE:T) recently announced a $39 billion acquisition of T-Mobile, a topic that has sparked considerable debate as it creates a new threat to Verizon (NYSE:VZ) and Sprint (NYSE:S) in the mobile business. We presented our immediate take on the deal in our article The Race for 4G: AT&T Buys T-Mobile. Interestingly, Verizon’s stock has seen a bit of upside since then. So what’s behind this trend?
There are two ways in which Verizon can benefit from AT&T’s proposed deal – pricing control and customer gains.
Our price estimate for Verizon stands at $36.62, roughly 5% below the stock’s market price.
Pricing Control
If we are to believe our economics textbooks, consumers benefit from a market with many players and healthy competition, as competition sparks quality improvement and lower prices. But the opposite can happen if the industry becomes more concentrated around fewer players. This seems to be the case for the U.S. mobile industry.
With AT&T’s acquisition of T-Mobile, the number of big-name mobile carriers falls from four to three. With Sprint battling its own problems, A&T and Verizon are the clear front-runners to control pricing. This implies that declines in average revenue per user (ARPU) for voice plans could slow and ARPU growth for data plans could accelerate.
You can test these scenarios, and see the potential impact on Verizon’s stock value by dragging the trend lines in the interactive charts above.
Customer Gains
How can Verizon get more customers out of this? As we’ve previously discussed in our article The Race for 4G: AT&T Buys T-Mobile, T-Mobile customers generate lower ARPU than AT&T customers. Often, these customers go with T-Mobile to avoid premium pricing on phones and service contracts.
As AT&T encourages the former T-Mobile subscribers to upgrade to the latest smartphones and take on premium data plans, these customers might stop and consider a broader range of high-end options. Since Verizon is often considered to be a more reliable service, it wouldn’t be a shock if these customers considered defecting to Verizon.
You can drag the trend line in the interactive chart below to see how a spike in Verizon’s market share would affect the company’s stock value.
