There’s more than a little irony in the details of the $39-billion acquisition by AT&T of T-Mobile. It’s been a frequent refrain of critics of Canada’s telecom/wireless industry that the small number of players combined with concentration keeps prices high and options for consumers limited. For example, high bandwidth limits available from U.S. carriers are usually trotted out as evidence of the disparity. When and if AT&T gets the regulatory go-ahead, those days may be numbered.
For investors, it’s essentially a slam-dunk and analysts are giddy over how good it looks. Craig Moffett at Bernstein Research says the new AT&T (NYSE: T) should emerge with a leverage ratio that is a very manageable 2.6x EBITDA and continue to pay dividends. Meanwhile, its subscriber base and market share will both jump almost 50%. And it will gain additional spectrum it can use to expand its network and ease the pressures from which it notoriously suffered when millions of new iPhone users hopped aboard a few years ago and started texting.
Equity holders are in a holding pattern: except for an early initial decline that has since been recovered, the stock hasn’t moved much. But because it’s still early days and the deal will have to clear regulatory hurdles before the months-long process of closing, even the current $28-and-change price could be considered a bargain. (Of course, volumes are low now, so getting any could be challenging.)
What likely won’t continue to be a bargain are service options for consumers. It seems inconceivable that T-Mobile’s low pricing will be maintained except as a periodic sales driver. AT&T says it has already promised the U.S. government that it will invest in expanding its 4G network nationwide if deal approval is granted; that will cost lots of money. In that roll-out there is the potential for higher margins combined with less churn (the term used to describe the process of consumers switching or dropping carriers for better deals), because of reduced competition, all of which may find its way to the dividend bottom line.
Together, Verizon and AT&T already account for 65% of wireless industry revenues in the States and about half its subscribers, so after the dust settles consumers are going to have fewer places to go. Just like Canadians. Welcome aboard!