MorningWord 12/24/13: Phone Numbers – $T $VZ $S $TMUS

by Dan December 24, 2013 9:30 am • Commentary

For those of you M&A watchers, telecom ruled in 2013, in large part to VZ’s purchase of Vodafone’s 45% stake in VZ wireless for $130 billion, but let’s not forget all of the horse trading for the bottom feeders in the wireless industry: Spring, Metro PCS & T-Mobile.  Offers were made, regulators regulated and back-room deals were consummated with some unlikely outcomes.  Sprint losses PCS to Deutsche Telecom, and the new entity is now T-Mobile US (TMUS). Sprint once the hunter became the hunted and now is almost three quarters owned by Japan’s Softbank, and now Sprint/Softbank are preparing to buy some or all of TMUS.

Did that all make your head spin?  Well, I haven’t even mentioned DISH and what the satellite TV provider has contemplated. But what is clear is the the market share leaders VZ and AT&T have had little latitude to buy smaller players for competitive reasons since AT&T dropped that bid to buy T-Mobile two years ago as it became clear that FTC would not approve such a deal.

As a consumer, it has been an interesting course of events.  Some industry watchers have held their breath during the feverish consolidation among the non-dominant players, looking for any signs that consolidation would bring less choice and thus better pricing power and greater profitability as happened in the airline industry over the last few years.  Anecdotally, this has not been the case, as pricing tactics by the “un-carrier” T-Mobile and Sprint have actually forced larger rivals AT&T and VZ’s hands on unlimited talk, messaging and data plans.  Make no mistake, just like wireline pricing before it, wireless and now wireless data has been a long race to the bottom.

Just yesterday, I got rid of my unlimited data plan that I have had with AT&T for 2 lines with limited talk and text that I have paid $220 a month for the last few years.  In its place, I just added a new line to make three and now my FIXED cost through their SHARE plans is $210 for limited data (10 geebees, which is a ton) and unlimited everything else.  This sort of pricing is very Un-AT&T and is not likely to help profitability for the entire industry.

Yesterday (via Barron’s Tech Trader Daily Blog) a small telecom boutique Moffett-Nathanson suggested that earnings estimates for the entire wireless industry remain high and mentioned rumors that TMUS may start to buy customers out of their early termination fees to switch to their lower priced plans.  If true, that would have a fairly negative impact on AT&T churn, as they are the most similar technologies (GSM based).

AT&T and VZ have sorely lagged the broad market (up 3% and 12% respectively), both well off of their earlier year highs when rates were much lower and their healthy dividend yields far more attractive. Sprint and TMUS are both much smaller market caps and in the eye of the M&A storm have fared much better.  Both have doubled off of their post deal lows, with much of the gains coming in the last few months as some investors see more deals to come.

While T and VZ look like reasonable valuations with nice dividend yields, the macro environment for wireless looks more competitive than it has in some time.  Between the two, VZ is probably the better bet, but both companies are at risk of a long, hard-fought competitive slug over the next few years.  In that case, earnings estimates might be too high, and value-trap would be the retrospective diagnosis.