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Prepare for Next Wave of Telco M&A - Analyst (T) (VZ) (DISH) (S) (TWC)

July 3, 2013 12:26 PM EDT
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Takeover activity in the telco space has been hot and heavy, but according to analysts at Macquarie the activity is not over and they are telling clients to "expect the unexpected before the deal window closes."

Macquarie analysts led by Kevin Smithen are anticipating a "wave of large transactions involving US telcos before a further rise in borrowing costs, slowing US wireless revenue growth, and potentially lower share prices prohibit significant transactions from occurring."

The recent Verizon (NYSE: VZ) bid for Wind in Canada and the bidding war for Clearwire (NASDAQ: CLWR) suggests to the firm that major carriers will continue to purchase spectrum opportunistically. "Unless the FCC clearly defines spectrum caps, we expect the Big 4 US carriers to continue to acquire as much spectrum as they can," Smithen said.

Given this, the firm upgraded Leap Wireless (NASDAQ: LEAP) to Neutral today and raised their target price to $7.50 and are incrementally more positive on NII Holdings Inc. (NASDAQ: NIHD) as a spectrum play after the recent selloff. The firm also noted heavy volume for both Outperform-rated DISH Network (NASDAQ: DISH) and America Movil (NYSE: AMX) last week and expect both to be key participants in future industry consolidation. The firm also reviewed ways Google (NASDAQ: GOOG) and Amazon.com (NASDAQ: AMZN) may enter telco services.

Macquarie highlighted several potential deals reported on by the press that could result in accretion to US telcos.

  • AT&T (NYSE: T) buys TEF in Brazil. Estimated 2015E FCF accretion = 8.1%
  • AT&T (NYSE: T) buys DISH (NASDAQ: DISH) at $60. Estimated 2015E FCF accretion = 9.1%
  • AT&T (NYSE: T) buys TWC (NYSE: TWC) at $140. Estimated 2015E FCF accretion = 11.2%
  • Verizon (NYSE: VZ) buys VOD (NYSE: VOD) stake in VZW. Estimated 2015E FCF accretion = 21.8%
  • AT&T (NYSE: T) buys VOD (NYSE: VOD) stub. Estimated 2015E FCF accretion = 29.6%
  • AT&T (NYSE: T) buys AMX (NYSE: AMX) at $26. Estimated 2015E FCF accretion = 30.1%

    Commenting on Google/Amazon, the firm believes both are interested in aggressively moving into telecom services. "While we think that an outright acquisition of a major telecom communication provider by either is unlikely, we do think that versions of an MVNO-type offering would fit their strategic goals. In our view, those goals include building out an ecosystem of hardware/software/services/content. We also believe that both GOOG and AMZN may use such positioning to further online and offline payment solution," analysts state.

    While the firm admits it is impossible to map out the exact roadmap for sector M&A, they suggest owning a basket of potential targets/partners including: Dish (NASDAQ: DISH), T-Mobile US, Inc. (NYSE: TMUS), Time Warner Cable Inc. (NYSE: TWC), America Movil (NYSE: AMX), KPN, Vodafone (NYSE: VOD), KD8, Shaw Communications, Inc. (NYSE: SJR), Liberty Global plc (NASDAQ: LBTYA), and Ziggo. At the same time, the firm said investors should be careful in being underweight/short asset buyers like AT&T (NYSE: T), Verizon (NYSE: VZ), DIRECTV (NYSE: DTV) and Sprint (NYSE: S)/SoftBank as these stocks could react favorably to EPS or FCF/sh. accretion and potential new growth opportunities.


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