FCC Supports Telecom Consolidation: Winners And Losers

In a landmark decision on May 20, Ajit Pai, the chairman of the Federal Communications Commission (FCC) expressed his support to the $26.5 billion proposed merger deal between T-Mobile US Inc. (NYSE:S) and Sprint Corp. (NYSE:S) . With this, it appears as though the FCC will clear the deal in a majority voting, which will result in significant consolidation of the telecom industry.

Ever since President Trump came to power, the telecom industry circle has been rife with speculation that his regime may pave the way for a merger between these two companies. Notably, T-Mobile US and Sprint are the third and fourth largest national telecom operators of the United States, respectively.

Change in Regulatory Stance to Aid M&As

The previous administration under Barack Obama was strictly against further consolidation of the U.S. telecom industry. Back then, FCC had firmly stated that it wanted at least four powerful national telecom operators in the country.

However, the restructured FCC under Trump’s presidency has given enough indications of its leniency compared with the Obama administration. The FCC has already rolled back a slew of stringent regulations of the previous regime. Notable among them are the Net Neutrality laws.

DOJ Still Reluctant to the Deal

T-Mobile US and Sprint have agreed to a number of terms including deploying a 5G network on low-band spectrum covering 97% of the country in three years and 99% in six years after the approval of the deal.

The two companies also pledged that 90% of rural Americans will access broadband speed of 50 Mbps within six years of the deal. They have also agreed to sell Boost Mobile – the prepaid wing of Sprint.

Despite a likely approval from the FCC, the U.S. Department of Justice (DOJ) is yet to give its green signal. The DOJ is concerned that the reduction from four national telecom operator to three will reduce competition and raise prices. The antitrust body is forcing the two entities to offer more concessions in terms of selling additional assets like spectrums or business divisions.

The Winners

Both T-Mobile US and Sprint will benefit significantly from the proposed merger. At present, Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) together control around 68% of the U.S. wireless market. The merged entity with around 32% market share will be a formidable challenger to both Verizon and AT&T. Consequently, stock prices of Sprint and T-Mobile US jumped 18.8% and 3.9%, respectively. T-Mobile US carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, Verizon and AT&T will also benefit as these two large telecom carriers were facing severe pricing pressure from unlimited data offerings of T-Mobile US and Sprint. If these two companies merge, Verizon and AT&T will face lesser competition and won't have to invest as much in marketing and promotions to retain subscribers. A decrease in promotional expenditure will raise their operating margins. Share prices of Verizon and AT&T increased 1.6% and 1.2%, respectively, following the news.

The chart below shows price performance of four national telecom operators in the lat three months.

The Losers

Major losers of the proposed merger will be wireless tower operators like American Tower Corp. (NYSE:AMT) , Crown Castle International Corp. (NYSE:CCI) and SBA Communications Corp. (NASDAQ:SBAC) . Yesterday, these three stocks plunged by 2.1%, 3% and 3.2%, respectively.

Consolidation of telecom operators generally results in lower capital spending. T-Mobile US and Sprint are being facilitated by the same wireless tower operators to install their cellular networks. However, a merger of these two will result in elimination of many overlapping towers and consequently, tower operators will lose on lease rentals.

Will you retire a millionaire?

One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”

Click to get it free >>