Verizon could engage in mergers or acquisitions in order to bolster its network or its content offerings, analysts at Wall Street research firm Barclays noted. Before the carrier pulls the trigger on any transaction, however, “an attractive case needs to be made.”
“While the carrier’s primary use of cash to deleverage its balance sheet, we wouldn't rule out the prospect of additional M&A,” wrote the analysts at Barclays in a note to investors issued this morning on Verizon’s outlook. “In our view, there are two potential avenues the company could proceed down—network and non-network (i.e. content).”
The Barclays analysts noted that, in its network business, Verizon could well acquire fiber assets or spectrum in order to bolster its wired and wireless offerings. In fiber specifically, Verizon’s management has said the company prefers to own fiber rather than lease it, and would score new fiber through construction or acquisition where applicable.
“The company applies the same philosophy towards spectrum,” the Barclays analysts wrote, noting that Verizon also prefers to own its spectrum rather than leasing it. “But spectrum is a market by market decision. Some parts of DISH’s spectrum would be attractive to acquire for example—and Verizon’s engineers know which markets would be attractive to its current portfolio. But they don't look at the asset on a holistic basis—i.e. nationwide. Thus they don't believe it would be offered on a market by market basis. Similarly 2.5GHz is attractive as a coverage layer for 5G, but lease terms for part of it make it less attractive because it subjects the carrier to potential pricing risks down the line.”
As for content, the Barclays analysts noted that Verizon doesn’t bundle a video offering like its competitors do. Specifically, AT&T continues to push its DirecTV Now offering by offering it at a discount to its unlimited wireless customers, while T-Mobile is offering a free Netflix account to its customers and Sprint is offering a free Hulu account to its customers.
And Verizon has said that it doesn’t need to offer a video product to remain competitive. “When you look at our value proposition, it continues to resonate strongly,” Verizon CFO Matt Ellis said last month.
“Currently, the company believes they can be partners, aggregators, distributors of content and still capture some of the upside and new revenue opportunities,” the Barclays analysts wrote. “For example, some of its sports partnerships have had material viewership levels but can be monetize via ad shares and new revenue sources, without spending ton of money to own content. Management wants to see how the market evolves. This isn’t to say that they wouldn't own content down the line. They just want to be smart (perhaps a better characterization is strategic) about it. Owning tangential businesses like theme parks etc. seems less intriguing for example.”
Importantly, the Barclays analysts said they expect Verizon to report a loss of phone-only wireless customers in the first quarter—but they cautioned that Verizon’s overall strategy in wireless remains solid, considering the company is working to build out a fiber-powered “intelligent edge” 5G network.
“While visibility on the pace of when new service initiatives could enhance its earnings profile remains limited, it seems clear that Verizon is committed to leveraging its 5G strategy to drive incremental differentiation and a time to market advantage as it attempts to capitalize on what it considers is the next wave of network led opportunities,” the Barclays analysts concluded.