A Regulatory Victory in Wireless Highlights Reaves’ Strengths

After the merger of T-Mobile1 and Sprint closed a little over a year ago, we posted a blog indicating our enthusiasm for the new entity.  We opined that while we could not assume monthly wireless bills would be getting any cheaper, consumers were likely to benefit from improved network quality. We believe the initial returns on pricing have been favorable with some aggressive, consumer-friendly promotions in the marketplace. For example, carriers have significantly discounted and even given away iPhones and other handsets to new and existing customers alike. While these marketing schemes may prove transitory, we think the groundwork has been laid for lasting improvement to network quality. Industry analysts broadly doubted a T-Mobile/Sprint deal could survive regulatory scrutiny. We imagine the initial success of T-Mobile, and the significant strategic response from its competitors, has exceeded the expectations of even the most strident supporters of the deal.

The Rise of T-Mobile

T-Mobile’s deal for Sprint was a triumph that followed years of meetings in boardrooms and courtrooms alike. That it was catalyzed by regulators rejecting AT&T’s attempted takeover of T-Mobile makes the saga all the more fascinating. That proposed transaction came with a break-up fee in the form of cash and wireless spectrum that armed T-Mobile with the assets necessary to compete as a standalone entity.  With a compelling marketing message and better network quality, standalone T-Mobile thrived.  Regulators rejoiced their decision. Oddsmakers in the T-Mobile/Sprint transaction cited the outcome of AT&T’s failed deal as the principal reason to doubt a successful merger was possible.

The Value of Network Quality

We believe the U.S. wireless consumer will continue to benefit when it comes to network quality. The aggressive response to T-Mobile’s new wireless arsenal leaves little doubt. Consider the following:

  • AT&T’s strategic about-face: AT&T responded to its rejected takeover attempt of T-Mobile by pivoting hard into media.  Specifically, it acquired DirecTV and Time Warner in an attempt to build what it called the “modern media company”. In the 14 months since T-Mobile merged with Sprint, AT&T has announced deals to unwind this strategy and monetize its media assets for cents on the dollar. It will use the proceeds to accelerate wireless capital expenditures. Under-investment in its wireless business is explicitly no longer an option for AT&T.
  • Verizon2 stays on-brand, if not totally on-message: Verizon was often criticized for failing to aggressively move into media as did AT&T. We were encouraged by the relative discipline. Still, for years, Verizon’s management indicated that its limited inventory of wireless spectrum was adequate to maintain wireless superiority. We believe the company’s greater than $50 billion outlay in the most recent wireless spectrum auction lies in contrast to this talking point. 
  • Don’t forget about DISH: While it’s still early to even call its competitive efforts in wireless nascent, this fall DISH began to announce a flurry of contracts with wireless infrastructure providers to begin building a network from scratch.
Reaves’ Outlook

With all the major wireless carriers in the U.S. announcing accelerated capital investment plans, we believe towers stand to be a principal beneficiary. We also continue to be attracted to the long-term durability of the wireless tower business model. The combination of improving demand and business durability should support the competitive returns we seek in our portfolios.  

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The Case for Essential Service Infrastructure

Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1As of Reaves’ 13F filing on 3/31/21, T-Mobile was held in some portfolios managed by Reaves Asset Management.

2As of Reaves’ 13F filing on 3/31/21, Verizon Communications was held in some portfolios managed by Reaves Asset Management.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

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