Verizon Merger Talk- Anything Goes….or Maybe NOT?

Merger and acquisition speculation has been rampant since the Federal Communications Commission (FCC)  ended its quiet period following the completion of the incentive auction for wireless spectrum.  Several telecom industry market analysts believe Verizon could end up buying Dish Network LLC to acquire new spectrum assets, but others believe the company may be in the hunt for a cable operator like Comcast Corp or Charter Communications Inc. to earn itself a last-mile network in several markets that could serve as backhaul for new 5G services.

On Tuesday, Verizon CEO Lowell McAdams told Bloomberg that his company would be open to merger talks with Comcast Corp., Walt Disney Co. or CBS Corp.  Is that all?

As the company upgrades its infrastructure to provide fifth-generation, or “5G” wireless services, Comcast’s fiber assets in particular could be used for cellular backhaul, which will be necessary due the surge in bandwidth capacity demands.

Mr. McAdam would entertain deal talks with Comcast CEO Brian Roberts to achieve those goals, he said in an interview Tuesday at Bloomberg’s New York headquarters.

“If Brian came knocking on the door, I’d have a discussion with him about it,” McAdam said. “But I’d also tell you there isn’t much that I wouldn’t have a discussion around if somebody came and said ‘Here’s a compelling reason why we ought to put the businesses together.’”

Among cable giants, Comcast has the best fiber assets, in addition to a compelling media business with NBC Universal.  McAdam said he would take that same call from Disney’s Bob Iger or CBS’s Les Moonves.

A combination between Verizon and any of the three companies would dramatically reshape the media and telecommunications industry, following AT&T Inc.’s $85.4 billion proposed acquisition of Time Warner Inc. — a deal that would make the telecom carrier one of the biggest producers of TV shows and movies in the world.

A major media deal would also be a departure for New York-based Verizon, whose acquisition strategy has so far contrasted with that of arch-nemesis AT&T. While the Dallas-based phone carrier snapped up satellite provider DirecTV and agreed to buy Time Warner in transactions valued in the tens of billions of dollars, Verizon has spurned old media and kept its purchases below $5 billion.

In the last two years, McAdam’s company has done deals for advertising technology and web traffic, acquiring AOL Inc. and the internet assets of Yahoo! Inc. Those are a far cry from McAdam’s most famous deal, the $130 billion acquisition of Vodafone Group Plc’s 45+% stake in Verizon Wireless in 2014.

Verizon’s most prominent entertainment investment so far has been go90, a YouTube-like video streaming service targeted at teens and preteens. The service hasn’t been a huge hit, so other media platforms that get more viewers could be attractive for Verizon.

“Randall buying into content has made people reevaluate their portfolio,” McAdam said of AT&T CEO Randall Stephenson. “We’re still very excited about Yahoo, bringing them into the fold with AOL. We’re building a lot of millennial-focused content. There are a lot of options out there.”

Verizon has looked to these smaller digital acquisitions to remake itself as the wireless price wars rage on. The carrier, which counts on the mobile-phone business for 75 percent of its sales, has struggled to find a balance between preserving profits and wooing subscribers with promos, freebies and price-cuts. In February, the company started offering unlimited data services for the first time, in part a capitulation to rivals who have stolen away their customers with similar offerings.

Shares of Verizon have fallen 4.9 percent in the past year through Tuesday, while CBS has surged 26 percent, Comcast 20 percent and Disney 13 percent.

Despite more favorable regulatory conditions, there’s no certainty a megadeal will get done. Cable, phone and media companies operate differently, with different management styles, and often have incompatible assets.

“Given what I know about architecture, financial requirement, cultural fit, there’s never a dream deal,” McAdam said.

For now, Verizon is focused on building a fiber-rich 5G network and developing a business that will place the company in direct competition with ad giants Google and Facebook.

“You can always have a wish list, but the practicalities of it limit your wish list,” McAdam said of deals. “My wish list right now? If I can find a company that had the fiber built for this architecture I’d scoop them up in a minute, but they don’t exist.”

…………………………………………………………………………………………

That doesn’t mean Verizon is going to announce a huge merger any time soon. In another interview on CNBC yesterday, McAdam said that Verizon hasn’t found the right fit for a merger from a network architecture standpoint. McAdam said Verizon is installing a lot of fiber to support its wireless network and that no company is matching what Verizon is doing.

McAdam reportedly said in December that a merger with Charter would make “industrial sense.” CNBC’s David Faber asked McAdam about that comment yesterday, and the CEO answered. “As we’ve looked at companies around the US, there is nobody building to the architecture that we’re talking about.”

McAdam then described Verizon’s plans to increase the density of fiber in cities such as Boston, saying, “A cable company would have customers, obviously, would have infrastructure, conduits, pole attachments. But it doesn’t have that kind of fiber.”

McAdam’s various comments about mergers aren’t contradictory. To summarize, he’s open to mergers with just about any company that can pitch a deal that makes sense, whether it’s another network operator or a programmer. But so far, McAdam is not convinced that other big network operators have the architecture to help Verizon’s fiber rollout.

Comcast says it has 145,000 miles of fiber installed across its 39-state territory, in addition to its extensive coaxial cable deployments. Verizon yesterday announced a deal with Corning to purchase up to 37.2 million miles of optical fiber and related hardware over the next three years.

“I think our shareholders expect us to look at every option, but I would tell you right now we haven’t seen the architectural fit, and we haven’t seen a willing seller and a willing buyer to have a meeting of the minds,” McAdam also said in the CNBC interview. “From a fiber perspective, nobody, whether you’re a fiber company or you’re a cable company, you don’t have the architecture that we’re talking about today.” For now, Verizon is building that architecture itself, he said.

Verizon now seems to be more interested in mobile Internet service (via the nation’s largest wireless network) than wireline home Internet (via FiOS) and has concentrated its landline network in the Northeast US after selling off networks in other states. Even where it still operates wired home Internet service, Verizon has clashed with city officials who say the company has failed to complete fiber-to-the-home rollouts. New York City filed a lawsuit against Verizon last month, seeking a court order to force Verizon to finish installing fiber throughout the city.

But buying a cable network might still be attractive to Verizon because cable dominates the high-speed broadband market, while much of Verizon’s wireline network is stuck on outdated DSL technology. While Verizon has the most mobile subscribers in the country, Comcast is the nation’s largest cable company and home Internet service provider. A merged Verizon and Comcast would have nearly 32 million Internet subscribers (24.7 million from Comcast and 7 million from Verizon), about 9 million more than Charter, the second biggest home Internet provider.

Verizon and Comcast have overlapping territories, so many customers who have two Internet choices today would be left with just one if they merged.

There’s more to consider than home and mobile Internet service when it comes to a potential Verizon/Comcast merger. Both companies have expanded into providing video and online content over the networks that they operate. Comcast owns TV programmers such as NBCUniversal and various regional sports networks, while Verizon owns AOL and is buying Yahoo. Verizon wants a piece of the online video streaming market but has struggled with its Go90 offering.

Comcast has reportedly acquired programming rights to offer TV channels nationwide, paving the way for a potential video service that would extend beyond Comcast’s cable territory.

References:

https://www.bloomberg.com/news/articles/2017-04-18/verizon-s-ceo-is-open-to-deal-talks-from-comcast-to-disney

https://arstechnica.com/information-technology/2017/04/verizon-ceo-wed-consider-merger-with-almost-anyone-including-comcast/

http://www.lightreading.com/mergers-and-acquisitions/verizon-ceo-comments-feed-merger-frenzy/a/d-id/732154

 

One thought on “Verizon Merger Talk- Anything Goes….or Maybe NOT?

  1. From April 21, 2017 WSJ pg 1 article:
    Verizon Customers Defect As Competition Ramps Up
    BY RYAN KNUTSON AND JOSHUA JAMERSON
    Verizon Communications Inc. is having to slash prices and offer more data to stem an unprecedented wave of customer losses, a maneuver that benefits consumers but hurts its bottom line.
    During the first three months of the year, the company posted its first-ever quarterly net loss of wireless subscribers, showing the extent of the damage resurgent rivals T-Mobile US Inc. and Sprint Corp. have inflicted on the nation’s largest carrier by subscribers.
    To stanch the bleeding, Verizon unexpectedly brought back unlimited data plans in February, which it had stopped selling in 2011, seeking to blunt the appeal of similar offers from T-Mobile and Sprint.
    That offer hit financials: Verizon had a 5.1% decline in revenue in its wireless business, which fell to $20.9 billion. Total revenue has now declined four quarters in a row. The results will put pressure on Verizon’s management to either find a way to turn things around or make moves that will diversify the company away from the wireless business, where most Americans already have a smartphone and price wars have pinched profits, analysts said.

    “The telecom industry is growth challenged,” analyst Craig Moffett wrote in a research note to clients, adding upcoming results from other carriers could be just as bad.

    The industry’s bruising price war has been a boon to consumers. Wireless bills are a major household expense, and their continued decline had a big impact on March’s surprising 0.3% drop in the consumer- price index. Prices for wireless telephone services fell 11.4% in March from a year earlier, after a 7% decline from February.
    “We’re confident in executing our strategy organically, but if there’s the right opportunity out there to accelerate the strategy inorganically in a way that adds holder value, we’re always looking at those opportunities,” said Verizon Chief Financial Officer Matt Ellis on a call with analysts on Thursday.
    Rival AT& T Inc. has diversified with its acquisition of DirecTV and proposed purchase of media giant Time Warner Inc. But Verizon doubled down on its wireless business in 2014 with its $130 billion purchase of Vodafone Group PLC’s 45% stake in their Verizon Wireless joint venture.
    The company has also explored bigger transactions, including with Charter Communications Inc., The Wall Street Journal has reported, though executives have recently signaled the two sides are far apart. More Verizon customers used the unlimited plans introduced in February to reduce their bills—moving from expensive data plans to the cheaper unlimited one—than choosing to pay up. Average revenue per account, including device payments, declined by $3, to $166 from $169 in the final three months of 2016.
    Delia Brown, a nurse’s assistant in Sandusky, Ohio, upgraded three of her Verizon phone lines to unlimited data and her monthly bill dropped more than $40. “I was happy about it,” she said of the price drop. It means “more gas in my car.”
    The introduction of unlimited plans, along with a “safety mode” feature launched last year, also chipped away at lucrative “overage” revenue, which comes from the fees Verizon charges when customers exceed monthly data limits.
    The company’s revenue and profit came in at less than Wall Street analysts were expecting. The stock, already down 8.3% so far this year, fell another 1% to $48.41 Thursday.
    Verizon said Thursday the unlimited data plans “positively changed the trajectory of customer additions” in the quarter, but it still reported a net decline of 307,000 retail postpaid connections during the first three months of the year, including 289,000 phone losses. That compares with 640,000 retail postpaid net additions in the year-ago period, including 8,000 phone losses. Before the launch of its “Verizon Unlimited” plans in mid-February, Verizon had a retail postpaid phone net loss of 398,000; after the launch, Verizon said it added 109,000 retail postpaid phone connections.
    Much of the pain Verizon is going through began as a result of moves T-Mobile began making in 2013, such as ending two year contracts and canceling overage fees. John Legere, T-Mobile’s chief executive, mocked Verizon’s results on Twitter. Verizon’s rivals are slated to report their latest results in coming weeks.
    Verizon expects improvement in wireless service revenue this year, with total revenue “fairly consistent” with 2016. But that would leave Verizon in a familiar position: slowing growth on the top and bottom lines, and a sliding stock price. Overall, for the first quarter, Verizon reported net income of $3.45 billion, or 84 cents a share, down from $4.31 billion, or $1.06 a share, in the year-ago period.

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