On April 1, 2020, as the world and its markets were focused on the impact of a global pandemic, T-Mobile US formally closed its merger with Sprint, a transaction that will likely alter the U.S. wireless landscape permanently.
The landmark transaction may permanently reshape mobile broadband service in the United States. T-Mobile and Sprint have long been thought to have inferior network capabilities compared to those of incumbents, Verizon and AT&T. With the close of their merger, T-Mobile and Sprint now house an unparalleled arsenal of wireless assets.
Oddsmakers were skeptical that the deal would clear regulatory hurdles following multiple failed attempts at consolidation in the industry, but T-Mobile ultimately clinched the deal by agreeing to help support DISH Network’s nascent wireless ambitions.
As part of the transaction terms, T-Mobile has agreed to certain pricing conditions that should help to prolong the challenger-brand spirit responsible for its recent successes. Questions about enforcement of pricing concessions will linger, but we do not intend to relitigate the merits of the case. However, we do see the potential for certain tangible consumer benefits. Network quality is a critical consumer battleground for carriers, and T-Mobile is well-positioned for material improvements. AT&T and Verizon will, of course, be forced to respond in kind. Accordingly, we believe your mobile service is about to become more reliable.
From an Investment Standpoint, Wireless Tower Companies Could be Real Winners
As long-time investors in telecom services, we have observed that monetization of new wireless technologies has been fleeting for the carriers. We will be watching closely to see if the new competitive dynamics will yield different results.
One thing that we do think is likely to persist is the potential for compelling returns from wireless tower stocks. The merger brings greater visibility to deployment plans for two large, currently dormant, swaths of wireless spectrum – those owned by Sprint and DISH Networks. This spectrum will create new business for its wireless tower hosts. Zoning and network architecture dynamics will likely reinforce the consistently high barriers to entry that towers have long enjoyed. Cash flow growth should thus remain durable.
T-Mobile’s deal for Sprint also comes with opportunities and challenges for cable investments. Altice USA’s wireless wholesale agreement with Sprint just got much more compelling, for instance. On the other hand, the merger was premised in part on the potential for wireless to bring competition to cable broadband. As Reaves’ investors know, we are skeptical of this dynamic, given what seems to be prohibitively high capital costs, but we will be paying close attention as wireless networks continue to evolve.
The T-Mobile-Sprint deal was a landmark one for both telecom investors and legal scholars. It did little, however, to shake our confidence in our investment philosophy – we identify businesses with strong pricing power and barriers to entry, such as tower and cable stocks, that can consistently grow cash flow through cyclical and secular changes alike.
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