This huge transaction can change the industry’s competitive dynamic. AT&T is seeking to acquire T-Mobile from its owner, Deutsche Telekom of Germany, for $39B in cash and stock. T-Mobile has 34 million subscribers in the United States, and after this transaction AT&T’s subscribers would rise to 130 million, surpassing Verizon’s total of 94 million. AT&T would become the largest wireless company in the United States. It would also give AT&T a clear advantage in scale versus its competitors.
The announcement surprised the market. The announcement of this transaction was a surprise to the market. Although it was anticipated that T-Mobile USA would be sold, reports had focused on T-Mobile's discussions with Sprint. The surprise was that AT&T stepped in as the buyer. For some time, the market had believed that AT&T would not be allowed to buy T-Mobile due to competition issues. Of course, this deal is still subject to regulatory approval from the Federal Communications Commission and the Department of Justice. The government will review the deal on public interest and competition concerns. However, AT&T has a successful track record of acquisitions and regulatory dealings. It demonstrated its confidence that this deal will be approved with limited concessions by agreeing, if the deal is rejected, to pay a break-up fee of $3B, plus some spectrum rights, to T-Mobile.
AT&T wants to overcome its capacity constraints. Why was AT&T interested in this acquisition? Significant synergies are always available from a transaction of this nature because the two companies have overlapping network footprints that function on the same GSM (Global System for Mobile Communications) standard. However, AT&T’s key strategic rationale was to address its capacity weaknesses. The company has been threatened by the rapid growth in mobile data traffic due to faster network speeds and greater access to content through smartphones. AT&T’s mobile data volumes are up 8000% in the past four years, and AT&T expects volume growth of an additional eight to 10 times in the next five years. To accommodate such growth in data traffic, the company needs to create more capacity with additional spectrum and a denser base station network. AT&T can get both of these by acquiring T-Mobile. Consumers would also benefit because a merger of the two would allow a nationwide rollout of the high-speed 4G LTE (Long Term Evolution) network faster than either company would have been able to achieve on its own.
Telecom companies are struggling for capacity to meet demand for mobile video. The exponential growth in demand for mobile data is both an opportunity and threat for telecom companies. These companies control the critical network infrastructure, which is seeing increasing capacity constraints thanks to booming demand growth. This capacity crunch is likely to give the companies the chance to derive new pricing power and deliver solid earnings growth in coming years. This is good news for companies with quality networks and adequate spectrum. However, it is bad news for companies with poor quality infrastructure. When accessing mobile data, unlike voice, consumers will be better able to distinguish between a good and poor quality telecom service provider. This distinction will allow companies with better network quality to charge a greater premium.
Mobile data represents a dynamic investment opportunity. A $39B purchase by AT&T reflects the opportunity the company sees in mobile data traffic. The United States leads the world in mobile data, which drives productivity and creates competitive advantages. At Putnam, we share this enthusiasm for the business opportunities created by mobile data. We believe that it will benefit telecom companies if they are able to translate growth in mobile data into profits and dividend growth for their shareholders.
Putnam Global Telecommunications Fund Top 10 holdings as of February 28, 2011
Vodafone Group Verizon Communications AT&T NTT Docomo Comcast Koninklijke KPN Telefonica Kabel Deutschland Telenet Group Holding Qualcomm
Holdings represent 67.29% of portfolio. Holdings will vary over time.
The views and opinions expressed are those of Vivek Gandhi, CFA, Portfolio Manager of Putnam Global Telecommunications Fund, are subject to change with market conditions, and are not meant as investment advice.
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