M&A catches fire: 24M wireless subscribers moving from Tier 2 to Tier 1 carriers

Mike Dano

A lot can happen in about three months.

After years of talking about mergers and acquisitions, the nation's top wireless carriers got down to business during the second quarter of this year, with T-Mobile US (NYSE:TMUS) working to integrate its purchase of MetroPCS and Sprint (NYSE:S) closing on its purchase of Clearwire and netting an investment from Japan's SoftBank. AT&T (NYSE:T) also announced the purchase of Leap Wireless (NASDAQ:LEAP), but that deal hasn't yet closed (though everyone expects that it will).

What does this all mean? It means that, if AT&T closes on its acquisition of Leap, around 24 million wireless subscribers will move from Tier 2 carriers to Tier 1 carriers: As of the first quarter of this year, MetroPCS counted almost 9 million subscribers, Clearwire counted 9.5 million and Leap counted 5.2 million.

Perhaps more importantly, the consolidation during the second quarter effectively wiped out the nation's major regional wireless carriers: U.S. Cellular (NYSE:USM) is now the only regional wireless carrier with more than 1 million subscribers (at the end of the second quarter U.S. Cellular counted just under 5 million customers). Ten years ago there were dozens of major regional wireless carriers.

For a detailed look at how U.S. wireless carriers performed during the second quarter, check out Strategy Analytics' grading of the top operators in the second quarter.

As a side note: U.S. Cellular appears to be suiting up to compete with plans to sell Apple's (NASDAQ:AAPL) iPhone, enhance its LTE network and launch shared data plans. But I wouldn't be surprised if Sprint or another carrier swooped in to snap up U.S. Cellular in the next few months or years. Already U.S. Cellular has sold significant spectrum holdings to T-Mobile. It's unclear whether U.S. Cellular's new CEO, Kenneth Meyers, is more amenable to a sale of the company than former CEO Mary Dillon.

As U.S. Cellular limps along, that leaves Verizon Wireless (NYSE:VZ), AT&T, Sprint and T-Mobile to battle it out. Each of these carriers believes it is in the pole position.

Verizon, the nation's largest carrier with fully 118 million customers, is preparing to flesh out its LTE network with the AWS radio waves it bought from a group of cable companies. And Verizon is clearly the carrier to beat: Verizon continues to report industry-leading metrics and has forecast that will continue throughout this year.

"Verizon Wireless remains the dominant asset in the industry," noted New Street Research analyst Jonathan Chaplin.

Indeed, analysts at Jefferies predicted Verizon's wireless margin will rise to a new record of 49 percent in 2013, 2.4 percent higher than what it was in 2012.

Behind Verizon is AT&T Mobility, the nation's second largest wireless carrier with 107.9 million subscribers. Although AT&T continues to report subscriber gains, the operator's position appears to be somewhat more tenuous.

"AT&T reported positive results including subscriber growth and revenue growth in 2Q13, yet continued to lose ground to Verizon," wrote Technology Business Research's Eric Costa. "Verizon easily outpaced AT&T in subscriber growth with 1.4 million net additions while AT&T brought in 632,000 net additions during the quarter. TBR believes AT&T will continue to post successful results in the postpaid market and with its Mobile Share plans but will continue to slowly lose ground to Verizon in terms of subscriber growth."

Jefferies analysts also pointed out that AT&T appeared largely unable to capture Sprint's fleeing iDEN subscribers, despite AT&T's launch of an overhauled push-to-talk service across its HSPA and LTE networks.

More broadly, AT&T is working to recover from its failure to acquire T-Mobile by updating its network through its Project VIP program and adding radio waves stretching from Qualcomm's 700 MHz to NextWave's 2.3 GHz WCS spectrum.

But the interesting developments are coming from T-Mobile and Sprint, which are both working overtime to position themselves as challengers to Verizon and AT&T. T-Mobile, fresh off its purchase of MetroPCS and the launch of its "Un-carrier" strategy, enjoyed a noisy second-quarter success. "1 million+ net new TMUS customers say the revolution's begun!" T-Mobile's gregarious CEO John Legere tweeted after the release of the company's second quarter results, which showed dramatic improvements in T-Mobile's customer metrics.

Although Legere promised T-Mobile's impressive successes in the second quarter were not "a blip," some consider them just that: "TBR believes T-Mobile will not be able to sustain this level of production from its postpaid segment in 2H13 once the initial demand for the Simple Choice plans dies down," wrote TBR's Costa. Costa also pointed out that much of T-Mobile's success on the postpaid side was at the expense of prepaid. Indeed, in T-Mobile's own quarterly SEC filing the carrier noted "the [prepaid] decreases were primarily a result of qualified upgrades of branded prepaid customers to branded postpaid plans as the Un-carrier strategy provides no annual service contract options to credit worthy customers that have historically been utilizing prepaid products."

But during the carrier's earnings conference call, T-Mobile's Legere promised the carrier will unveil "Un-carrier 3.0" sometime "soon," and while he was vague on what that would entail, he said it "will solve another customer pain point." I'm betting this has something to do with family plans or shared data, products that have helped tie customers to AT&T and Verizon.

But it was Sprint that offered both the bleakest and brightest elements in the second quarter. The carrier shed a whopping 2 million subscribers during the period, largely due to its iDEN shutdown and its trailing position in LTE.

"We believe Sprint is struggling to attract customers, particularly business customers as its LTE build lags its rivals," Jefferies analysts noted.

But Sprint also announced plans to use SoftBank's investment to build out a massive, nationwide LTE network that will stretch across 800 MHz, 1900 MHz and 2.5 GHz bands.

"Sprint should be able to grow revenue, given that they have 35% of industry capacity in a capacity constrained market with just 15% of industry revenues," wrote New Street's Chaplin. "Sprint will use its capacity and network speed advantage to take share. If they gain 5% of share in five years, they would create an additional $6.92/share in value."

Chaplin also said a merger between Sprint and T-Mobile was "likely," and that "we see more upside to Sprint than any other stock in our universe over a 2-3 year time frame."

For a detailed look at how U.S. wireless carriers performed during the second quarter, check out Strategy Analytics' grading of the top operators in the second quarter.

--Mike | +Mike Dano | @mikeddano

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