It’s been nearly a week since AT&T revealed the planned spin-out of WarnerMedia to combine with Discovery Inc., leaving it with more firepower when it comes to broadband and wireless. But all in all, it’s still not enough to propel the carrier above rivals in wireless, according to a few analyst reports in the intervening days.
At first take, analysts at Oppenheimer summed it up thusly: The transaction is positive for towers, equipment and construction suppliers, and negative for wireless competitors and cable. Just how positive and negative remains to be seen, but increasing capex by about 15%, to some $24 billion annually, certainly beats AT&T’s previously spending for wireless and broadband.
It’s definitely a bonus for the AT&T folks deploying its C-band spectrum, of which it won more than $23 billion worth in Auction 107. Now AT&T is increasing C-band investment to reach 200 million people covered with the mid-band spectrum by the end of 2023, which is double the 100 million PoPs it targeted previously.
That compares to the 200 million people T-Mobile expects to cover with 2.5 GHz spectrum by the end of this year; it already covers 140 million. Verizon aims to cover 100 million people with C-band within a year and 250 million by 2024.
“To be clear, AT&T’s moves unquestionably make them a more viable competitor in wireless than would otherwise have been the case. But that was a low bar; they had no shot whatsoever at keeping pace with T-Mobile before the Discovery transaction. Their additional capital spending – they’ve committed to a $2B per year increase to $24B – will help,” wrote MoffettNathanson analyst Craig Moffett in a May 21 report for investors.
“They are still poised to be third in a three-horse race to 5G,” he added. “T-Mobile has a much stronger spectrum position and a years-long head start on deployment. Verizon is years ahead in small cell deployment and densification.”
To de-lever, “AT&T will have to grow their Mobility business. But how? Today, they are buying share (actually, buying lower churn) by subsidizing new handsets for existing subscribers. That’s working to grow their subscriber base – and it has wreaked havoc on Verizon – but they’re paying for it in falling ARPU. Their service revenue growth is stagnant, their margins are falling, and their EBITDA in the Mobility segment is still in decline. What AT&T does next will determine the path forward not just for them, but for Verizon and T-Mobile as well,” Moffett said.
It’s worth noting that there was some doubt that AT&T would even be able to aggressively compete in the C-band auction, and after it emerged the second largest spender, analysts pointed to how pricey it will be to densify networks for broad C-band coverage.
However those chips fall, analysts at Wells Fargo anticipate increased competitiveness coming from T-Mobile, Verizon, the cable companies and Dish Network. AT&T is “still likely 6-12 months behind” Verizon and more than two years behind T-Mobile in building out a compelling mid-band 5G network. They expect to see momentum in subscriber acquisition start to wane as switching activity and competitive intensity ramp up starting in the second half of 2021.
“We fail to see how [AT&T] can continue its current promotional pace while achieving mid-single digit EBITDA growth (with mobility as the biggest driver),” they wrote.
New Street Research analysts are more upbeat than before, upgrading AT&T shares to “buy,” with a $35 price target. AT&T was trading around $30 per share on Friday (May 21).
“Whatever you thought the stock was worth last Friday, it’s worth at least $2 more now (their share of synergies),” wrote New Street analysts in a May 20 report. “AT&T still faces acute challenges in all their businesses, but whatever you thought of their ability to face those challenges was last Friday, they were unequivocally better positioned to face them this Monday, with lower leverage, higher capex and a paired back dividend commitment.”
MoffettNathanson expects the situation to get worse for AT&T before it gets better. An increasing focus on 5G will highlight T-Mobile’s “burgeoning network superiority,” putting more pressure on AT&T and Verizon. In addition, newly aggressive pricing from Comcast will further constrict the pool of net additions available to AT&T and Verizon.
“Perhaps more importantly, we expect Verizon to now more aggressively respond to AT&T’s promotionality. They have been left with no choice,” Moffett wrote.