Why companies are fixated on a T-Mobile acquisition

Market Realist

Overview: Can T-Mobile and Iliad find the right wavelength? (Part 2 of 7)

(Continued from Part 1)

Companies are fixated on a T-Mobile acquisition

Based in Bellevue, Washington, T-Mobile U.S. Inc. (TMUS) is a telecommunications services provider in the United States. Its coverage includes all major metropolitan areas and over 280 million people or 96% of Americans. The company’s telecom services include wireless voice, text, and data services. In terms of subscribers, it’s now ranked the #1 provider of prepaid wireless plans and the fourth largest provider of post-paid plans among all telecom companies in the U.S. (Source:Company filings).

When size becomes a growth advantage

TMUS has been able to leverage its smaller size to exponential growth over the past few quarters. The company reported ~1.47 million net customer additions in 2Q14—the fifth consecutive quarter with over one million additions. Customer additions far surpass its other rivals Verizon (VZ), AT&T (T), and Sprint (S).

On August 6, 2014, the company reported it had overtaken Sprint to become the #1 prepaid wireless carrier in the U.S. Here’s what the upbeat president and CEO of T-Mobile, John Legere, talked about becoming the #1 player in the market. “The good news just keeps on coming for T-Mobile. The momentum we’re seeing with our T-Mobile and MetroPCS brands is outstanding, and the fact that we’ve blown by everyone to take the #1 spot in prepaid is icing on the cake. As a matter of fact, I’m going on record—I predict we’ll overtake Sprint in total customers by the end of this year. Not someday. Not next year. This year. Americans are voting with their feet, and they’re joining this Un-carrier revolution by the millions.”

The company attributes its success to innovations like:

  1. No annual service contract plans
  2. Its “T-Mobile Test Drive” initiative whereby customers can try out Apple’s iPhone 5s and their data plan free for seven days
  3. Its JUMP! device upgrade program
  4. The launch of “Contract Freedom,” which reimburses early termination fees to customers who switch to T-Mobile

Quick recap of 2Q14 results

Total revenues recorded growth for the fourth consecutive quarter in 2Q14, growing 8% year-over-year (or YoY) and 4.5% quarter-over-quarter, respectively, primarily on higher equipment sales.

However, higher net additions and revenues may not translate to the bottom-line. While the company has updated its Branded Postpaid Net Adds, or customer additions, guidance for fiscal year 2014 from 2.8–3 million to 3–3.5 million, its adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) guidance is unchanged at $5.6–$5.8 billion.

The average revenue per user (or ARPU) has been steadily declining over the last four quarters due to customers migrating to Simple Choice plans. The ARPU was 2.3% lower quarter-over-quarter at $49.32. The company appears to be favoring a short-term trade-off, a larger customer base or wider footprint, although with a slightly lower ARPU. With projected capex unchanged, this strategy should payoff over the long-haul.

That said, the company has recorded a quarterly profit in 2Q14 of $0.498 per share, beating consensus estimates of $0.093 per share by a long shot. Adjusted EBITDA increased over 33% quarter-over-quarter to $1.5 billion.

In the next section, you’ll find out how many firms in the telecom sector (VOX) are possibilities for to acquiring T-Mobile and why the market buzz shows no signs of slowing down.

Continue to Part 3

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