Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Before we dig into four examples of those who had to work straight through the summer, let’s update a few of the trends we have been developing over the past few months. First, the thesis that the local telephone provider DSL plant is under assault from carrier, business and consumer disconnection activity is alive and well. As several of you reminded me this week, this does not mean that the “central office” infrastructure is dead or obsolete, but that it will need to be repurposed more quickly. However, bypassing the central office entirely is the new and preferred design for redundant networks, and that certainly limits the upside of any traditional infrastructure.
To the thesis of using the current low interest rate environment to generate shareholder value, I neglected to mention the updated refinancing information provided by AT&T in their latest 10-Q (which was released on August 3). Here’s the excerpt from that report:
Cash used in or provided by financing activities
For the first six months of 2012, our financing activities included proceeds of $6,935 from the following:
• February 2012 issuance of $1,000 of 0.875% global notes due 2015, $1,000 of 1.6% global notes due 2017, and $1,000 of 3% global notes due 2022.
• May 2012 issuance of £1,250 of 4.875% global notes due 2044 (equivalent to $1,979 when issued).
• June 2012 issuance of $1,150 of 1.7% global notes due 2017 and $850 of 3% global notes due 2022.
During the first six months of 2012, debt redemptions totaled $7,021 with a weighted average interest rate of 5.68% and consisted of the following:
• February 2012 redemption of $1,200 of 6.375% senior notes due 2056.
• March 2012 redemption of $1,000 of 5.875% notes due August 2012.
• June 2012 redemption of $800 of 4.75% notes due November 2012, $2,500 of 4.95% notes due January 2013, and $1,500 of 6.7% notes due November 2013.
The bottom line here is that AT&T, through this batch of refinancing, was able to save about $200 million annually in interest charges and lower the average coupon rate to 2.81% from 5.68%. Think of it as the 50% off sale for AT&T’s treasury department. Savings from lower debt costs purchases more shares and potentially funds a higher dividend payment. It’s a “rinse and repeat” activity that, if used for the remaining $57 billion of AT&T debt, could finance a meaningful portion of their increased share repurchase.
Without a doubt, the treasury departments of many in the telco community have had their vacations shortened if not cancelled this summer. On top of the refinancing activity last week, Sprint Nextel announced a $1.5 billion offering with a 7% coupon, which attracted interest only because they indicated that one of the possible uses of the proceeds would be for “potential funding of Clearwire Corporation and its subsidiary Clearwire Communications L.L.C.” Anyone who has been following the Sprint Nextel/Clearwire saga is not surprised by this disclosure, but that certainly did not keep the pundits from speculating that this activity, in addition to the announced departure of Sprint Nextel’s strategist and corporate development head Keith Cowan and comments made this week by CEO Dan Hesse about the need for increased consolidation must mean that Sprint Nextel is contemplating something big.
One offering of $1.5 billion does not an M&A strategy make. Sprint Nextel’s focus will continue to be on the deployment of their next generation network (Network Vision), which by most reports is going well. In order to make Network Vision a reality, Sprint Nextel will need to repurpose some of their voice and data needs to the 800 MHz band. This spectrum is currently being used for iDEN and will not be available nationwide to Sprint Nextel customers until mid- to late-2013. Prior to widespread availability, one way to continue to satisfy increasing needs for data is to use Clearwire’s 2.5 GHz spectrum. As Eric Prusch announced in Clearwire’s earnings call in late July, they are currently readying 1,800 cell sites of LTE-Advanced-ready for Sprint Nextel (and other wholesale customer usage) by the end of the second quarter of 2013.
Bottom line: If the Clearwire launch of Advanced-ready sites goes well, it would not be surprising to see Sprint Nextel accelerate Clearwire’s LTE-Advanced deployments, particularly in spectrum-constrained markets. This week’s debt placement secures that option.
While we have identified two groups of individuals who have been very busy this summer – telecom treasury departments and the Sprint Nextel/Clearwire joint engineering group, there are plenty of others who have been burning the midnight oil and earning “fluorescent tans” in 2012. There are two integration teams to note here that could make a real impact in 2013 depending on their summer activity. First, Verizon purchased Hughes Telematics in June for $612 million. This acquisition was completed in late July.
Hughes brings a treasure trove of machine-to-machine solutions to Verizon Business (it’s interesting to note that Hughes will be managed as a separate entity and not be directly managed by Verizon Wireless), most notably the automotive/connected car segment. (Note: for those of you who forgot, Hughes was at one time a part of General Motors.) However, as was pointed out by the folks at Computer World, Hughes also has investments in Lifecomm, one of the leaders in the development of “wearable M2M.” Both the integration of Hughes’ current capabilities as well as their expansion into other vertical areas of the Verizon Business portfolio will drive shareholder value for Verizon’s latest acquisition.
In the area of core infrastructure, a team from Zayo is working feverishly on the integration of AboveNet into their core connectivity portfolio. While Zayo is no stranger to acquisitions, this one is by far the largest ($2.3 billion including debt) and the most expansive. On a pro forma basis, Zayo has nearly $1 billion in annualized revenues and $530 million in annualized earnings before interest, taxes and depreciation (commonly known as EBITDA). The combined company will operate in 45 states and 7 countries covering 61,000 route miles. Also, as a result, the company will have approximately $3.5 billion in total debt.
Zayo, while private, is not a wallflower in the industry. Dan Caruso, Zayo’s founder, saw the demand for infrastructure and the need for a consolidated national (and global) approach to both cell tower backhaul and enterprise wavelength and Ethernet access as early as 2005 – far ahead of anyone else in the industry. The AboveNet acquisition takes Zayo into a services layer, however, an area that Zayo has historically not pursued. The translation of significant fiber and collocation assets into synergistic value will be the easy part for the Zayo team. The transformational impact of operating a large IP backbone and managing secure virtual private networks for large enterprises and carrier wholesale organizations will be challenging. Completing the first integration phase by the end of 2012 will be critical.
Telecom treasury departments, the Sprint Nextel/Clearwire joint engineering group, as well as the Verizon Business/Hughes Telematics and Zayo/ AboveNet integration teams have all had busy summers – no doubt about it. However, next week’s Reality Check will cover small cells, which present both the greatest opportunity to utilize current spectrum as well as the greatest headaches in the industry. Doing small cells right involves rethinking current RF planning techniques, understanding how to manage capacity at the building level and achieving new levels of cross-carrier partnerships. Apologies in advance – next week’s column will be slightly longer than normal, but well worth your time.