What generally happens when industries have only regional providers or merely a whole slew of competitors? Usually it boils down to mergers for size and scale, then outright acquisitions to eliminate competition. We have seen this consolidation in the wireless space with AT&T Inc. (NYSE:T), Verizon Communications Inc. (VZ), Sprint Corp. (NYSE: S) and T-Mobile US Inc. (TMUS).
Fitch Ratings recently showed that the four largest U.S. wireless carriers have some 92% of the U.S. market share. The long and short of the matter is that M&A in the U.S. wireless space has seen its heyday. 24/7 Wall St. has compiled a full-spectrum analysis of which wireless and telecom carriers and providers can still be acquired and which ones simply cannot.
The good news for investors hoping for M&A is that some players do still exist. The bad news is that these players now all will be considered weaker competitors on their own, meaning that investors have to be very careful if they want to buy a company based only on its own merits and opportunity.
We agree with Fitch Ratings in its belief that few material targets remain when operators and spectrum holdings are considered. We also operate under the same belief as Fitch that the Federal Communications Commission (FCC) would restrict any further material consolidation among the top wireless carriers. So the real question, and opportunity, outside of the wireless carriers is where else to look for M&A.
One such move that Fitch expects in the near term would be that Dish Network Corp. (DISH) will make a wireless strategy move within the next few months, and according to outsiders it would likely be in some form with T-Mobile US Inc. (TMUS). Fitch said, "Activity around DISH could be the most significant near-term wireless industry consolidation event."
Elsewhere, Fitch believes that the 578 to 698 MHz TV spectrum auction could occur around 2015 or 2016, and that auction alone could represent the largest single acquisition event for the industry over the foreseeable future. Unfortunately, that leaves no room for investors because you cannot invest in the government nor in the FCC. Another hopeful from Fitch is some or all the LightSquared L-band spectrum.
The Verizon Communications Inc. (VZ) deal with Vodafone Group PLC (VOD) is the largest deal and has been years in the making. Now Verizon gets to own effectively all of Verizon Wireless. One fear of 24/7 Wall St. is that Verizon may have to work on its leverage now rather than continue to pursue annual dividend hikes.
The end of M&A may take away oomph for the quick in and out traders and may limit special situation investing. The good news is that this could be the best thing in the world for dividend-hungry investors. Fitch was specific to say that the end of the M&A cycle will bring steadier financial trends and called it a consolidated and maturing marketplace.
24/7 Wall St. has gone back over the telecom and wireless operators that are left. There are still some potential acquisition candidates, but our focus revolves around who can close a regional dominance gap or who can bring other spectrum assets or other lesser-known assets to the table. Here are some of the possibilities after some freshly closed and pending transactions.
Atlantic Tele-Network Inc. (ATNI) offers wireless and wireline telecom services in North America, Bermuda and the Caribbean. Its ALLTEL spectrum and customers are under an acquisition of AT&T right now and after the FCC forced Verizon to sell coverage areas in Georgia, North Carolina, South Carolina, Illinois, Ohio and Idaho. The company's current market value is a mere $760 million.
Leap Wireless International Inc. (LEAP) is being taken into the AT&T empire as well. MetroPCS Communications also was acquired by T-Mobile. Virgin Mobile was acquired by Sprint, long before Softbank gobbled up Sprint Nextel and Clearwire.
United States Cellular Corp. (USM), which is effectively under Telephone & Data Systems Inc. (TDS), has been a name up for grabs before. Sprint Corp. (NYSE: S) is closing down its acquired portion of the U.S. Cellular network by the end of October. U.S. Cellular has been speculated as a buyout name in the past, and perhaps it could be again with a $3.65 billion market value. TDS has a market value of $3 billion. How a merger would work here is likely a two-step process, as U.S. Cellular is a majority-owned subsidiary of TDS.
Cincinnati Bell Inc. (CBB) is one that we have considered a possible target for years, but now that may be complicated with its recent data center spin-off of Cyrusone Inc. (CONE). The market value for Cincinnati Bell is only $612 million. Its Wireless segment is only a part of the company and is a licensed service territory serving Greater Cincinnati and Dayton, Ohio, and areas in northern Kentucky and southeastern Indiana.
Shenandoah Telecommunications Co. (SHEN) is also a broader telecom outfit with a small footprint. Its total market value is only $418 million, and its wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona in Pennsylvania to Harrisonburg in Virginia. At the end of 2012, it owned some 150 cell site towers and had 216 leases with wireless communications providers.
There are two regional players specific to Alaska: General Communication Inc. (GNCMA), worth some $369 million, and Alaska Communications Systems Group Inc. (ALSK), worth a mere $127 million. Is a deal possible in Alaska, or does anyone want to bother? If so, the dealmakers might want to consider closing on it during the summer when it is not so cold and when they have almost endless daylight to work on it.
Would any acquirer want to go after CenturyLink Inc. (CTL) or Windstream Corp. (WIN) for their multitude of telecom and communications assets? We doubt it, based on things the way they are today, but by now everyone knows that any company could be a player or a target. CenturyLink is worth almost $20 billion, while Windstream is worth almost $5 billion.
Two names that have dropped off the M&A radar and possible rumor mills are Vonage Holdings Corp. (VG), valued at $665 million, and magicJack VocalTec Ltd. (CALL), valued at $250 million. These are VoIP telecom players rather than wireless targets, but a telecom acquirer could suddenly take in millions of fixed-line accounts here. You know the bulk of each's customer base also owns cellphones. magicJack most recently had an estimated 3.36 million active MJ subscribers and about 4.37 million app users, while Vonage recently claimed about 2.3 million subscribers.
Hawaiian Telcom Holdco Inc. (HCOM) is worth a mere $263 million, but wireless is a tiny portion of its business and this may fall under the same sort of local risks for a possible buyer that the Alaskan companies are in as well. The footprint may simply be too small to matter, and state laws and taxation are possible risks. This company is actually now in the midst of making a small data center acquisition of its own.
BlackBerry Ltd. (BBRY) cannot be left out, even if it is a handset maker and patent owner rather than a carrier. The company is under strategic review right now, and frankly it has to hope for a buyout because it is simply too problematic to recapture its former glory for its current management team. BlackBerry's market cap is still less than $6 billion, now that its stock is down so much from its highs.
We want to conclude with one last possibility in wireless consolidation. The ownership of cellular towers is an industry that has consolidated but still could consolidate further. One name that used to be a potential acquisition was SBA Communications Corp. (SBAC), even though it actually recently made an acquisition of its own. Its market cap is now $9.6 billion, yet the company keeps having normalized losses and is expected to have losses this year and next year, according to the 16 or so analysts that follow the company.
Controlling the cell towers is a big business because communities would rather not have more and more towers, and most buildings and high points that cellular towers need are already occupied. American Tower Corp. (AMT) has converted to a real estate investment trust (REIT) and is worth $27 billion, even as shares are close to a 52-week low and down almost 20% from a high. Crown Castle International Corp. (CCI) is worth $20 billion, and while not close to a 52-week low the stock is down some 15% from its high.
So, this proprietary report on "who is left to acquire in telecom and wireless" is something we have considered for quite some time. All you have to do is to consider just how many telecom and wireless mergers have taken place. Our guess is that you could ask a deal counter or someone who has had to rubber stamp mergers at the FCC and Department of Justice and they would merely say "too many to count." Here are just some of the many telecom and wireless companies that have been acquired: Nextel, ALLTEL, Arch Wireless, Cingular, Qwest, Pac Bell, VoiceStream and on and on.
When Fitch made its predictions and observations, most of which we agree with, it said:
The long-term future for regional or small wireless operators is uncertain at best ... these operators will continue to face difficulty in remaining competitive with the large nationwide operators. Fitch believes that these operators will eventually be acquired by larger wireless operators. Regardless of the time horizon considered, the consolidation of the wireless industry is nearing an end and future competitive positioning will rely on operating strategies rather than on mergers and acquisitions.
We have seen some speculation that ultimately a deal could be done in some form between Sprint and T-Mobile, but Fitch effectively has nixed that. If there is one last merger to be done on the larger scale, that likely is it. We simply expect great regulatory fears, and these companies already have had enough network and spectrum integration issues that they may just choose to fight it out for which carrier will jockey for the number three and number four position years into the future.
Now that the buyout potentials are done, and if AT&T or Verizon are now done in the major M&A game, then the end result is that the post-consolidation phase of wireless and telecom almost certainly leaves more safety of dividends ahead. The telecom and dividend royalty members are AT&T Inc. (NYSE:T) and Verizon Communications Inc. (VZ). AT&T is king of the dividend dance with a 5.3% dividend yield, and Verizon is somewhat further behind as a second prince with a 4.3% yield.
The telecom and wireless landscape already consolidated massively. There are still some deals to be done on the carrier side, but the reality is that the size of today's remaining companies simply means that the great mergers likely have already been seen. The finishing note may simply be that dividends from the "solid" telecom and wireless players appear to be ever safer ahead.