T-Mobile US acquiring Sprint: doing 5G-based FMC after all

T-Mobile US (DT 62%) acquires Sprint (SoftBank 83%)

• $26b in shares (no cash out), EV $59b: 9.75 Sprint for 1 T-Mobile US (1 Sprint = 0.10256 T-Mobile US = $6.62), EV combination $146b

• DT to own 42% (voting rights 69% incl. perpetual proxy from SoftBank; SoftBank has certain veto & info rights), SoftBank 27%, to be consolidated by DT

• synergies NPV $43b (net of $15b integration costs) from network integration & build-out (incl. 5G), sales & marketing, store fittings, advertising, customer support, repairs & logistics, efficiencies in internal IT & billing; run-rate savings >$6b from 2024 (assuming effective from YE 2018; excl. IFRS 16 effects)

• to close 19H1, subject to DoJ, FCC, security authorities; no break-up fees

• John Legere CEO, Mike Sievert COO & President, Timotheus Höttges Chair, DT to appoint 9 (incl. 2 indie) of 14 Board members, SoftBank 4 (incl. 2 indie)

• outlook & dividend DT 2018 unchanged, positive effect on EPS after 3 yr, leverage to exceed 2.0-2.5x (2.9 YE 2019), expects max. 1 notch downgrade (current Moody's Baa1/neg., S&P BBB/stable, Fitch BBB+/stable), return to 2.0-2.5 (i.e. 2.5) by 2021 (1.8 in 3-4 yr)

• T-Mobile US to redeem all shareholder loans from DT (to reduce directly by $8b to $6.6b)

• T-Mobile US to pursue Un-carrier strategy; "... will be able to roll out 5G technology more quickly and better than either T-Mobile US or Sprint would have been able to do alone. To do this, the intention is to focus on convergence products combining fixed and mobile communication offerings, a portfolio with which Deutsche Telekom is already very successful in Europe"

• to invest $40b in first 3 years; to employ more staff than the two previous companies put together (from call center capacity in rural areas, network build-out, maintenance, new stores)

Sprint Nextel: no inflection point nor WiMAX success just yet

Sprint Nextel is a tricky investment case. On the one hand, there is a meltdown of sorts. On the other hand, WiMAX holds a promise as a 4G solution. For those wanting to catch up, read these two articles: Light Reading summarizes all the big disasters (management, churn & customer service, joint ventures & technology choices), while IEEE focuses on the biggest issue going forward: WiMAX.

All will depend on the company reaching an inflection point and the take-up of the Xohm WiMAX-service. Success is inevitable, but timing is everything.

I believe it is still to early to jump in.

As to the former, it is very hard to make a trustworthy valuation in a case like this one. Market target prices range from $12 to $28, but personally I believe the share is still overvalued (based on takeover speculation, I suppose, related to Comcast which may find it harder to grow its basic subscriber base when capped at a 30% penetration rate).

As to the latter, I am a big believer in mobile broadband, but one has to be realistic. Mobile data so far is a big disappointment.
WiMAX may have a headstart over LTE, but there are several challenges: (1) LTE is the technology of choice for most entrenched players (all GSM and possibly some or most CDMA operators, including Verizon Wireless), (2) how does it scale?, (3) will there be enough of a choice of handsets and devices?, (4) will Xohm be open enough, and last but not least (5) demand as related to pricing.
What Sprint needs to do most, I believe, is to make Xohm really open to all internet-based services and it should come at a reasonable price.
Look out for usage numbers at Vodafone, which may have finally understood that currently data tariffs border on the insane. Vodafone NL is reducing data tariffs by up to 85%.

Behind the end of OEN and Sprint/Clearwire

Here is an interesting story on why OEN (Optical Entertainment Network, a FTTH company in Houston) folded. Apparently there were management issues, but it seems to have boiled down to a tech matter: PON (gear from Alloptic) v. active ethernet (gear from PacketFront). The company couldn't decide. "It was a group of engineers getting together and having a serious case of vendor love."

(PON is cheaper to deploy and has a shorter reach. Active ethernet requires more active electronics, a fatter backbone and therefore looks more future-proof, but it comes at a 15-20% premium.)

By the way, look out for France where FT is a supporter of PON, v. Iliad and Neuf favoring active ethernet.

Which brings me to another (so-called) demise: the end of the intended Sprint/Clearwire partnership in rolling out WiMAX. A new ABI Research report (I haven't seen it, just the abstract) justly points to the fact that it wasn't a contract but an LoI only. I agree with Phil Solis of ABI that the parties may still come together, but I believe they need a different approach, preferably full network sharing.

And: communicating a little better with the investment community.

Update on WiMAX

Some more factoids (see also the previous update).

• Standard: the ITU approval, I would add, is a set-back of sorts. Not 4G but 3G, as Mr. Daniels eloquently put it. I suppose if you want 'xG' real-life performance, you better aim for '(x+1)G' lab-performance. (Also, compare this WiFi distance record: 382 km!)
• Sprint/Clearwire: much has been said about the consequences for Sprint, Clearwire, Intel, Motorola and the rest of the WiMAX industry. I think Sprint doesn't communicate very well about its intentions, deploying so many standards (iDEN, CDMA, WiMAX). Also, the original MoU was somewhat puzzling to me. Building out together is only logical, but why not put the network assets into a joint venture? The way it was set-up made it look like a complicated roaming deal.
• WiMAX v. cellular: KPN decided to go with HSPA, not WiMAX, for rural deployments (fixed-line replacement, with WiFi for in-home and Digitenne for TV). No surprise: cellular technology is heavily entrenched.
• Deployments: recently mostly in emerging markets.
• Auctions: coming up in Japan, Italy, Mexico and New Zealand.

FTTH keeps moving ahead in August

Returning from a long holiday period, I want to summarize the big news of August, with a T.I.M. (telecom internet media) twist.


1. FTTH
The local Metro free daily reports on Reggefiber. This Dik Wessels (a Dutch billionaire who made his money in the construction sector, as well as by being part of World Online when it went public) vehicle builds out in the Netherlands. The costs are EUR 1000 for passing and EUR 300-400 for connecting a home. Reggefiber intends to add 150k connections a year, or 50% of the nations total FTTH connections.

Other new deployments were planned in Barcelona (Spain), Mauritius, Hawaii, Canberra (Australia), Chattanooga (Tennessee) and Iowa, Dundas (Minnesota?) and South Africa. Again, lots of activity in the US, as well as another utility (EPB in Chattanooga) joining. Who has additional English language information on Adamo Europe (the one doing Barcelona)?

Also, Telekom Slovenija detailed its plans (still among very few PTTs/ILECs), devoting EUR 450m.

Finally, PacketFront has acquired DynamicCity, operating the UTOPIA network in Utah (that looks like an interesting deal!).


2. Third Pipe
KPN is testing both WiMAX (with Samsung) and HSPA (with Ericsson) for rural access. This is a fixed (DSL) replacement service first of all, so don't count WiMAX out just yet. In fact, it could be clever from the point of view of traffic unloading: mobile networks are much more capacity constrained than fixed networks, to it could be wise to dedicate HSPA to mobile wireless access.

Further, Sprint detailed its WiMAX plans ('Xohm'), very much a mobile offering. But then, they have CDMA and Nextel for 'offloading' voice and P2T.

Finally, DirecTV enters the BPL market by teaming with Current Group (Google and Hearst hold a stake). Its coverage area is very limited, so DirecTV will still need to team with others.


3. Consolidation
The KPN takeover of Tele2/Versatel Belgium lead to some interesting (albeit obvious) conclusions: KPN is serious about Belgium, but a Belgacom merger will not happen; the same strategy will likely be followed in Germany, perhaps involving Versatel Germany (no longer related to Tele2/Versatel); after that, who knows what - France ?


4. Credit crunch
Over at Wolters Kluwer, $12m in sales is affected. A small acquisition can be seen as mitigating this.

McGraw-Hill and Moody's are bleeding.

Network operators give limited clarity

Network separation as well as sharing are gaining momentum, but several operators provide limited clarity on their long-term strategies.

• Sprint Nextel: having several networks (iDEN for P2T, CDMA for voice and data) already, it is ready to add WiMAX (for 4G) to the mix. The iDEN networks needs investments for maintaining a certain quality level, while the CDMA network is being upgraded continuously (Rev A, B, C). The company appears to be looking for a partner in WiMAX. Will all networks converge one day?
• Deutsche Telekom: outside Germany and Eastern Europe (where it owns PTTs), the company has a mobile-only strategy (with WiFi). However, buying Orange NL would add an LLU operator. OK, that can be sold on, but to whom?
• France Telecom: selling Orange NL makes sense, given weak market positions in both wireless and LLU. However, the company owns many wireless operators and yesterday added Austria. So far, triple play offerings are limited to France, Poland, the UK and Spain (as well as fixed/BB in several smaller countries). What about the mobile-only operations, like Austria - will they add LLL or BB?

Some short-term triggers

Here are some possible triggers for short-term movement, before the new reporting season starts:

• Telefonica: to decide on the sale of its 75% Endemol stake (late March). Mediaset and John de Mol are candidates.
• OTE: Greek state to sell 20% stake (late March). This could be the chance for Telefonica or DT to step in.
• Vodafone: investor day on UK and Germany in London (March 30). Time for bullish news to turn those businesses around. When will topline growth return?
• AT&T, Verizon, Qwest, Sprint Nextel: US government to award Networx Universal contract (late March). The second part, Networx Enterprise, will be awarded late May. Together, they are valued at $20bn over 10 years. Looking at the partners each brings, my bet is on AT&T.
• KPN: investor day on new structure (April 4). The company will no longer report along the Fixed/Mobile line, but along Consumer/Business. Wholesale & Operations contains the physical infrastructure and a fourth division is devoted to IT services in the Netherlands.
• Yahoo!: hiring new CFO and Audience Group CEO (weeks away?).

WiMAX round-up

Just for convenience:

• Technology: IEEE proposes the new 802.16m standard.
• Hardware: Palm rumoured to plan a WiMAX Treo - ultra-thin, mind you.
• Roaming: WiSOA sets up the first alliance.
• IPOs: Clearwire debuted as the #3 pureplay (after xG and Towerstream).
• Plans: Vodafone and Sprint provide views.
• Tenders: Italy, Taiwan, Israel, Thailand.
• Trials: Swisscom, TVA (Brazil), Worldmax (Netherlands), Altech (South Africa).
• Deployments: BSNL in India, Dialog in Sri Lanka, Nexcom in Bulgaria, Åre Network in Sweden, Neotel in South Africa, Emax in Peru, UHT in the Ukraine, Arab Telecom in Kuwait, ABC in Canada, EgyNet in Egypt, the state of Catalonia, Telecom Namibia, ICE in Costa Rica, etc.