AT&T's Stephenson: Iusacell deal will create synergies with Cricket prepaid biz

AT&T (NYSE: T) CEO Randall Stephenson said he is enthusiastic about the growth prospects for the company in Mexico following the company's announcement of a $2.5 billion deal to purchase Mexican operator Iusacell. He also said that a large portion of the customer base of AT&T's Cricket prepaid brand has personal connections to the Mexican market, and there will be synergies between Cricket and Iusacell.

Stephenson noted that there is a large segment of the Cricket customer base that is Hispanic and has connections to Mexico and that there is an "incredible amounts of cross-border traffic between Cricket and companies in Mexico." The Iusacell deal will help AT&T take advantage of synergies between the two companies, he said. One of the opportunities AT&T has, Stephenson said, is that smartphones AT&T customers trade in via its Next equipment installment plan can be refurbished and sold to Cricket customers or taken down to Mexico and resold there.

Stephenson, who has lived and worked in Mexico at points in his career, said he has recently become "very enthusiastic" about the market and the government's rules for opening up the telecommunications sector. For example, the country's new rules require market leader América Móvil, controlled by billionaire Claros Slim, to offload assets as part of an effort to get its market share in Mexico below 50 percent from around 70 percent. Speaking at the Wells Fargo Technology, Media & Telecom Conference, Stephenson said that the rules "make it very, very attractive for companies to come in and invest" in expanding network coverage and capacity.

The AT&T chief said that Mexico has a middle class that is growing, a young population, a vibrant economy and a lack of mobile broadband penetration. Together with Iusacell, AT&T would cover 400 million POPs between the U.S. and Mexico, and Stephenson said the carrier is looking to invest in Mexico to accelerate mobile broadband adoption there, likely via LTE, which Iusacell has not deployed.

"We think it's going to be a terrific growth opportunity," he said.

Stephenson was coy about whether AT&T would invest in additional wireless carriers in Mexico and the Latin American market, as some analysts have speculated. He said "Iusacell is a terrific platform" with a strong spectrum portfolio, though its network will need to be built out (the carrier only covers around 70 percent of the Mexican population). He noted that Nextel International has some "Mexican assets we would find attractive," but added that because the company is going through bankruptcy proceedings it's difficult to know what assets might emerge to be purchased.

Stephenson also said that although América Móvil will likely be divesting assets, AT&T doesn't know which assets will ultimately be sold or how the Mexican government will view the sales. Complicating any purchase of América Móvil assets by AT&T is the fact that AT&T recently divested 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 proposed $48.5 billion acquisition of DirecTV (NASDAQ: DTV), which is still being evaluated by U.S. regulators. AT&T's recent relationship with América Móvil might preclude AT&T from buying América Móvil's assets, though Stephenson said that the company does not need to purchase América Móvil assets to be successful in Mexico.

Turning back to the U.S., Stephenson said that President Barack Obama's call for the FCC to reclassify broadband as Title II common carrier services has injected greater uncertainty into the company's planning for major investments, like building out fiber to 100 cities. "We can't go out and invest that kind of money deploying fiber to 100 cities not knowing under what rules those investments will be governed," he said, adding later, "We're in a pause moment right now on those kinds of investments."

AT&T has been a staunch opponent of reclassifying broadband as a Title II service. Stephenson said that FCC Chairman Tom Wheeler has been trying to "thread the needle" to enact new net neutrality rules that would ban paid prioritization of traffic and increase transparency without having to resort to reclassification.

Stephenson said Obama's statement on the topic "brought clarity" and "basically laid out a position in terms of what his expectations were" for how broadband services should be regulated. A move toward a Title II reclassification would reverse two decades of how the FCC has viewed broadband, which has been as a lightly regulated information service. If the FCC reclassified broadband under Title II, Stephenson said the process could drag on for as many as three years as the FCC goes through a rulemaking process and inevitable litigation. As a result, Stephenson said AT&T is starting multi-year wired and wireless network infrastructure projects without clarity on how those networks will be governed.

Stephenson noted AT&T's recent decision to halt plans to build a nationwide wireless network for airplane passengers using LTE service on WCS spectrum. "Literally, if you were to put these services under Title II, it becomes unclear how those kinds of services might be regulated," he said, referring to in-flight Wi-Fi AT&T was considering providing.

Much has been made of AT&T's plans to cut its capital expense budget for next year by 14 percent to around $18 billion. Stephenson noted that for the past three to four years the company has been investing at a "torrid" pace, spending around $20 billion to $21 billion per year. "I'm not sure you could find a four-year string of time where a company has invested more in the United States," he said.

Now that AT&T has largely completed its Project VIP program, including building LTE coverage to 300 million POPs, AT&T is going to return to more historical levels of capex to around 15 percent of revenues. "We're still going to spend $18 billion in capital," he said. "I will be surprised if that is not the highest U.S. capex outlay in 2015."

For more:
- see this webcast
- see this Reuters article
- see this Washington Post article

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