Dropped Calls? The Shake-Up in Wireless

By Mark Morelli - October 17, 2012 | Tickers: T, CLWR, S, TMUS, VZ | 0 Comments

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It has been quite a month (and year) for the wireless industry.

A Japanese company, Softbank, just announced that it is interested in acquiring a 70% stake in U.S.-based Sprint (NYSE: S). The deal would mark the biggest-ever overseas acquisition by a Japanese firm.  Both are ranked number three in market share in their respective countries.

Both have lots of debt, although Softbank has recently stabilized it somewhat. Sprint has a long term debt/equity ratio of over 180%. It currently does not make a profit. Taking on the iPhone probably contributed to the balance sheet problems.

In addition to benefiting Sprint by providing a much needed cash infusion to maybe pay down a portion of debt, the potential $20.1B deal, including a $3.1B convertible bond, $4.9B in newly issued stock, and $12.1B in stock purchases from current investors, may also help Clearwire (NASDAQ: CLWR). Sprint owns a 49% stake in Clearwire, which has negative earnings, no cash, and lots of debt too. Clearwire shares jumped 15% on the day the deal was announced. The company builds wireless broadband networks used for Internet communications.

The deal must clear several regulators and part of it also must be approved by shareholders.  The convertible bond will be issued by Sprint prior to the deal closing.

MetroPCS (NYSE: TMUS) announced earlier this month that it wants to acquire T-Mobile USA. That deal would combine the number 4 and 5 U.S. carriers and create "the leading value carrier in the U.S. wireless marketplace, which will deliver an enhanced customer experience through a wider selection of affordable products and services, deeper network coverage, and a clear-cut technology path to one common LTE network" according to a joint statement released by the companies on the day of the merger. 

Shares of AT&T (NYSE: T), Verizon (NYSE: VZ) and Vodofone (ADR) were all beaten down on the merger news. Investors in those stocks believe that a pumped-up Sprint will reduce future returns for them. Verizon and Vodofone (based in the U.K.) are partners in the number one ranked U.S. wireless carrier, Verizon Wireless. The wireless business of AT&T is number two. 

AT&T had planned to acquire T-Mobile USA last year but dropped the bid after it ran into U.S. government regulatory problems. Based upon a draft report released to the media, the agency responsible for the wireless industry, the Federal Communications Commission, probably would not have approved the deal anyway. According to Chairman Julius Genachowski "[the merger] didn't meet our standards." A successful closing would have allowed AT&T to expand its infrastructure in LTE technology.

The failed $39B effort resulted in over $4B in charges against earnings for AT&T. The company also had to go through an analyst downgrade recently in part based upon the Metro PCS/T-Mobile plan. A triple-whammy for them over the last year.

So how has the recent flurry of activity affected the share prices of the players? It looks like the companies being acquired (directly or indirectly) have fared very well while those companies left behind or doing the deal have suffered. 

T data by YCharts

It remains to be seen what the long-term effect will be in the wireless industry. For now things certainly have been shaken-up. Investors in the big two U.S. carriers plus Vodofone may need to ride out the merger storm in the short to medium term. Juicy dividends in the 4% to 6% range may help tide things over in the meantime. Investors in Sprint, Clearwire, and MetroPCS/T-Mobile probably have to hope for a turnaround in the long-term.

I hope there aren't any dropped calls anywhere.

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