AT&T (NYSE: T) is getting lots of wireless spectrum in Mexico on the cheap by buying bankrupt NII Holdings' Mexican wireless assets, according to financial analysts. And AT&T might not stop there and could look to bulk up its position in Mexico by acquiring assets that former partner América Móvil is going to divest, according to the analysts and other industry sources.
In a research note, Macquarie Capital analysts Kevin Smithen and Will Clayton wrote that the Nextel Mexico purchase, for $1.88 billion less outstanding debt, is "one of the savviest deals" AT&T has made in years. They noted that AT&T is snapping up 2.8 million postpaid and primarily corporate subscribers with heavy U.S. cross-border activity, as well as 20 MHz of nationwide 800 MHz spectrum and around 100 MHz of total nationwide spectrum "at a very attractive price."
In addition to 30 MHz of AWS spectrum, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note Monday that the Nextel deal could also bring AT&T 50 MHz of nationwide 3.5 GHz spectrum.
However, the Macquarie analysts think AT&T will likely need to invest $3 billion to $4 billion over the course of three years to deploy LTE in Mexico, which could pressure AT&T's dividend coverage and debt burden.
Nonetheless, the analysts are high on AT&T's move and think it's a page out of Dish Network (NASDAQ: DISH) Chairman Charlie Ergen's playbook. Dish has amassed a portfolio of more than 50 MHz of spectrum for relatively little money. The Macquarie analysts think AT&T is "getting a high-quality spectrum asset at a discounted price due to Nextel's" reorganization process.
The Nextel deal comes just after AT&T closed its $2.5 billion purchase of Mexican carrier Iusacell. Nextel Mexico's network covers around 76 million people, a little less than Iusacell's network.
The Iusacell deal netted AT&T all of Iusacell's wireless properties, including spectrum licenses, network assets, retail stores and around 9.2 million subscribers. Iusacell's wireless network currently covers around 70 percent of Mexico's approximately 120 million citizens, or 84 million POPs.
AT&T plans to create what it has dubbed the first-ever "North American Mobile Service area" covering more than 400 million consumers and businesses in Mexico and the United States.
"After the Iusacell deal was announced, we wrote that AT&T's required LTE investment in Mexico would be better amortized over 20-25m subs than the 9 m subs at Iusacell," the Macquarie analysts wrote. "We still believe [AT&T] will buy [América Móvil] assets in order to achieve the required scale and marginalize [Telefónica] as a distant #3 player in the market."
The analysts think if AT&T "plays hard ball" with América Móvil, its owner Carlos Slim can pull $1 billion of annual traffic on its U.S. MVNO TracFone Wireless away from AT&T or sell TracFone to Google (NASDAQ: GOOG). "Moreover, we do not think that [AT&T] wants to provoke Slim into buying T-Mo, which we believe would be very bad for the U.S. wireless industry structure and [AT&T] over the long-haul," they added.
América Móvil is seeking to offload some assets as part of an effort to get its market share in Mexico below 50 percent from around 70 percent amid antitrust pressure from Mexican regulators. Mexico instituted a new law in July 2014 that seeks to create more competition in the telecommunications market, especially for América Móvil.
In November, John Stankey, AT&T's chief strategy officer, did not rule out bidding for América Móvil, saying AT&T was "keeping all options open," but that the values being discussed were "not necessarily all that attractive," according to the Financial Times.
Complicating matters is the fact that AT&T used to be an investor in América Móvil. At the end of June 2014, AT&T sold its 8.27 percent stake in América Móvil for $5.57 billion to shareholders Inmobiliaria Carso and Control Empresarial de Capitales. AT&T sold the stake as part of the regulatory approval process related to its $48.5 billion acquisition of DirecTV (NASDAQ: DTV), which is still being evaluated by U.S. regulators. That might make it more difficult for Mexican regulators to approve an AT&T purchase of any divested América Móvil assets.
Yet there are indications AT&T may be interested in the assets after all. "Expanding in Mexico and Latin America is going to be a big part of AT&T's strategy going forward. They couldn't before because of their relationship with Carlos Slim . . . now they have the freedom they need," an unnamed person familiar with the AT&T's thinking told the FT. "There will definitely be more deals in the region . . . it might take some time for the next one but they aren't stopping here."
Citi analyst Michael Rollins told the FT the Nextel deal was "another step towards possible additional acquisitions in Latin America to build further scale in Mexico."
"We believe that AT&T will not be satisfied with around 12 percent of subscribers within Mexico," he said. "Hence, we expect it to continue to consider ways of expanding within Mexico both organically and through acquisition."
For more:
- see this FT article (sub. req.)
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Correction, Jan. 28, 2015: This article incorrectly referred to Nextel Mexico as being in bankruptcy protection. In fact, NII Holdings, Nextel Mexico's parent company, is currently in bankruptcy protection.