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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