It’s been more than four months since the FCC’s incentive auction quiet period ended, and we still haven’t seen any major merger-and-acquisition activity in the telecom space. Why?
It’s a situation that has sparked a fair amount of consternation among market analysts and industry watchers, with BTIG analyst Walt Piecyk even keeping a running count of the amount of time—131 days at last tweet—that has gone by without at least some kind of definitive M&A announcement from T-Mobile, Sprint, Charter, Comcast, Verizon, Dish Network, Amazon or some other major telecom player.
It’s definitely a surprise, given the relatively sky-high expectations that at least some kind of matchup would be announced shortly after the end of the quiet period (the FCC prohibited incentive auction bidders from engaging in M&A discussions during the event, in order to avoid collusion).
So why hasn’t anything happened yet?
The answers to that question vary pretty wildly, depending on who you ask.
“Nobody is under distress that they have to move right now, even Sprint,” Roger Entner, founder of Recon Analytics and a FierceWireless contributor, told me. He blamed those sky-high M&A expectations on the “irrational exuberance on the part of the press.” (Hey, if you can’t generate some irrational exuberance about M&A you probably shouldn’t be in the press anyway.)
On the other hand:
“There has been an exhausting amount of activity, much of it very public,” Jonathan Chaplin, an analyst at Wall Street firm New Street Research, said in a separate interview. “All that activity has just failed to produce a big deal … so far.”
Entner, for his part, explained that no major telecom player is under the gun to ink a transaction right now. Sprint, he said, was widely expected to ink a merger with T-Mobile, but thanks to the cost-cutting efforts by Sprint’s CEO Marcelo Claure, the operator isn’t under a significant amount of pressure to complete the deal now. T-Mobile and its parent Deutsche Telekom, meanwhile, have little incentive to purchase a controlling interest in Sprint because T-Mobile recently acquired significant spectrum resources through the FCC’s 600 MHz incentive auction, and T-Mobile also continues to gain share in the market through its Uncarrier momentum.
T-Mobile, Entner said, can sit back and “watch how this Sprint thing will play out,” waiting for valuations to decline, in the meantime gaining share from Sprint organically each quarter.
And what of other players? “You have to be very gutsy to enter the market right now. And who are you going to buy? Verizon? AT&T? This is the most competitive market in the world,” Entner argued. “Buying T-Mobile is very expensive. And buying Sprint, I think Masa [Masayoshi Son, SoftBank’s chief executive] would have to swallow a huge pill because he would have to sell it for less than he paid for it,” Entner said, explaining that SoftBank’s asking price for Sprint likely remains fairly high.
Most other players in the telecom market are in the same situation, Entner said, explaining that Dish owner Charlie Ergen can afford to sit on his trove of spectrum, and he can retain his spectrum licensees by meeting the FCC’s buildout requirements through the relatively inexpensive construction of an NB-IoT network.
Cable companies, meanwhile, can enter the market through MVNOs, as Comcast has done via its Xfinity Mobile MVNO with Verizon, Entner said. Cable company executives are thinking that “the cost of winning a customer is so high, why don’t we go after the soft underbelly of reducing churn and learn about this market,” he said. “So they get that low-usage base [of customers who may not use a lot of wireless data], but that’s so profitable for the wireless companies.”
Indeed, cable executives have argued as much: "There is nothing we have to do around wireless or content that is a necessity for Charter to have a very, very successful business and to continue to deliver the type of shareholder value that we always have,” Charter Communications CFO Christopher Winfrey said recently.
“In transactions, someone needs to be extremely motivated,” Entner concluded, adding that any company that was considering M&A in order to obtain additional spectrum could instead participate in the FCC’s incentive auction or AWS-3 auction. “Nobody is in distress.”
New Street’s Chaplin offered a different take
“The big deal that everybody anticipated was a Sprint/T-Mobile merger. Nobody expected Sprint and Cable to have exclusive talks for two months about a potential deal, or Malone and Buffett to potentially take a stake in Sprint, or Sprint and partners to potentially acquire a cable company,” he said. “The common view [when the quiet period ended] was that Sprint was desperate, with no choice but to sell to T-Mobile, while T-Mobile had a host of potential suiters. I guess that was wrong. I think we will still end up with a Sprint/T-Mobile deal by year-end, but the path to get there has been more convoluted than we expected. The question is, will there be a deal with cable too?”
Moreover, Sprint and T-Mobile aren’t the only companies on the hunt, Chaplin noted. “Outside of the Sprint melee, we have seen Verizon attempt a deal for Charter and be rebuffed, Altice explore a deal, Comcast consider a deal … and these are just the discussions that are public.”
Chaplin added that some telecom players too may be waiting for Sprint and T-Mobile to consummate their merger, and for the Department of Justice to rule on AT&T’s purchase of Time Warner, before embarking on their own transactions.
“At the beginning of the year one of the most successful investment bankers in the sector cautioned me that the vast majority of discussions end with no deal, and the deals that happen almost always take much longer to get announced than people expect,” Chaplin concluded. “I guess he was right.”
The reason that there are differing viewpoints on this topic is because no one really knows what’s going to happen, other than the executives directly involved with the process. For my part, I’ve been expecting someone to snap up Dish’s spectrum licenses for the past four years at least, so this latest bout of M&A drama feels a little like more of the same.
That said, I do find it difficult to see Sprint remaining under SoftBank’s wings forever; I think at some point it will be involved in some type of transaction, either with T-Mobile or some other company. However, I don’t see cable making any major moves into wireless, at least for the time being.