AT&T, Verizon facing ‘the most incremental risk’ from collapse of Sprint/T-Mobile merger negotiations

As highlighted by Yahoo Finance, Verizon's shares took a substantial tumble this morning following news that Sprint and T-Mobile failed to reach a merger agreement.

Merger talks between Sprint and T-Mobile fell apart over the weekend, and now Wall Street’s financial analysts are looking at what this means for the rest of the industry’s players. And as the dust clears, the consensus appears to be that AT&T and Verizon will clearly face significantly more pressure with Sprint and T-Mobile saying single, while tower companies like Crown Castle and American Tower will definitely benefit from a market with four nationwide wireless players.

“With the market’s two biggest disruptors in TMUS/S remaining independent, and the emergence of two highly profitable Cablecos as newer market entrants (CMCSA, CHTR), we think Verizon and AT&T have the most incremental risk,” wrote the analysts at Deutsche Bank in a research note issued yesterday. “Verizon derives nearly 85% of EBITDA from Wireless, and has the most market share; despite the Wholesale revenue benefit from its Cable relationship, we still see it at most risk (it also lags AT&T in absolute spectrum holdings). While AT&T has no shortage of market challenges (PayTV and Enterprise have their own secular issues), its diversification away from Wireless in recent years (now only 55% of EBITDA) should help lessen the impact (relative to VZ).”

“With no chance of TMUS and S combining, we believe VZ and T valuations have limited room for expansion because there is less chance of the competitive environment improving in the near-term,” agreed the analysts at Scotia Capital in a note issued this morning.

“The only positive for AT&T and Verizon is that there is slightly less chance of Cable companies receiving an aggressively priced MVNO from T-Mobile / Sprint that would allow cable to be more aggressive in the wireless market,” noted the analysts at New Street Research in a note to investors yesterday. “Although, perhaps this is offset by a greater risk of a network sharing deal between cable and one of the challengers.”

Indeed, in recent quarters AT&T and Verizon have been struggling to counter the aggressive actions of both Sprint and T-Mobile; both of the nation’s smaller nationwide wireless carriers have been working to steal market share from the nation’s two wireless behemoths.

And this morning investors appear to have heeded concerns that AT&T and Verizon will face increased pressure; Verizon’s shares fell from around $47 per share on Friday to around $45 per share this morning.

Towers pop

So if AT&T and Verizon are clearly the losers this morning, who is coming out on top? “Towers? Monday should be a very good day,” wrote the analysts at Wells Fargo in a research note issued yesterday.

This morning, Crown Castle’s shares jumped by almost $7 per share over their closing on Friday, to around $113. American Tower’s shares rose by roughly the same amount this morning.

“Towers win in two ways: first, the overhang of tower decommissioning is gone (we thought this could be at least 29-46k towers); second, Sprint will now need to invest in earnest,” the analysts at New Street wrote.

Sprint’s outlook cloudy at best

As the market digests the failure of Sprint and T-Mobile to come to an agreement, eyes are also turning to what each company might do now. Generally, analysts sounded notes of concern about Sprint’s prospects.

“Sprint (and its parent company Softbank) had been most vocal around the need for greater scale and value of partnerships, and so the lack of a deal (with TMobile, or larger Cable partners like CMCSA/CHTR) is a clear negative,” wrote the Deutsche Bank analysts.

“For S, the key question for investors will be how will a standalone Sprint invest in the network while maintaining its commitment to de-lever the balance sheet?” noted the Wells Fargo analysts.

Analysts generally agreed that the outlook for T-Mobile, which has enjoyed significant success in recent years following CEO John Legere’s “Uncarrier” moves, is slightly more upbeat than Sprint’s. But they expressed concerns too, including the possibility that T-Mobile may seek an M&A partner elsewhere.

“We also note larger peers are pushing back more aggressively vs. earlier in T-Mobile’s ‘UnCarrier revolution’ (T/VZ are both in market with unlimited plans, with the former leveraging aggressive content bundles). The spike in competitive intensity has somewhat moderated TMUS’ gross/net add growth this year,” noted Deutsche Bank analysts. “So, with rising Wireless competition and the potential for greater capex investments as we head deeper into an unlimited/5G world (to keep pace with bigger incumbents), we do think the company (and its parent Deutsche Telekom) may need to re-consider strategies to improve scale / potential partners (e.g. DISH, as the WSJ has reported in the past) over the longer-term.”