Zacks Analyst Blog Highlights: AT&T, Verizon Communications, Vodafone Group, Apple and Sprint

Mar 22, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, March 22, 2011 /PRNewswire/ -- Analyst Blog features: AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Vodafone Group Plc (NYSE: VOD), Apple Inc. (Nasdaq: AAPL) and Sprint Nextel.


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Here are highlights from Monday's Analyst Blog:

Analysis of AT&T/T-Mobile Deal

AT&T Inc. (NYSE: T), the second largest mobile service provider in the U.S., will buy Deutsche Telekom unit T-Mobile USA for $39 billion, representing $25 billion in cash and the balance in AT&T common stock. Notably, T-Mobile is the fourth largest U.S. wireless provider.

The deal has been approved by the directors of both companies and is expected to close in 12 months, pending several regulatory approvals.

The German telecom operator, Deutsche Telekom, will get an 8% stake in AT&T to become its largest shareholder. T-Mobile will retain some of its current exposure to the U.S. market.

Merits of the Deal

Here are some of the benefits that AT&T will draw from the merger:

Marker Leader: The combination will create America's largest mobile phone company surpassing the largest wireless U.S. provider, Verizon Wireless, a joint venture of Verizon Communications Inc. (NYSE: VZ) and Vodafone Group Plc (NYSE: VOD).

Revenue: The combined T-Mobile and AT&T will likely generate increased wireless revenues of $80 billion, up from $58.5 billion reported in 2010. The deal will boost the percentage of AT&T's total revenue from wireless, wireline data and managed services to approximately 80%.

Subscribers: The deal will add 34 million customers to AT&T's wireless subscriber base, bringing the total number of wireless customers to 130 million for the combined company.  AT&T is expected to lead the market with 43% of combined share, up from the current 32%, leapfrogging Verizon Wireless' 34.5% share.

Profitability: The transaction is expected to be earnings accretive in its third year. It is expected to boost earnings through synergies of more than $40 billion.

4G Deployments: Post merger, AT&T will expand its 4G Long Term Evolution (LTE) technology to almost 95% of the U.S. population. This implies that 46.5 million more Americans mostly in rural and smaller communities will come under its coverage. Currently, AT&T expects its subscriber base to reach 70 to 75 million by the end of this year.

Spectrum Efficiency and Improved Network: The deal would inspire AT&T to acquire pending spectrum licenses that were exhausted due to exponential growth in mobile broadband traffic. Additionally, the company is looking to bolster its network expansion to compensate for its challenging video and data services from devices such as Apple Inc.'s (Nasdaq: AAPL) iPhone and iPad. AT&T lost its exclusive hold on iPhones in early February when Verizon started selling the device.

Sprint Edged Out: The deal ruled out rumors that Sprint Nextel Corp. (NYSE: S) would acquire T-Mobile for 50% interest in the combined company. However, T-Mobile did not agree to its valuation.

Healthy Balance Sheet: AT&T will assume no debt from T-Mobile and continue to have a strong balance sheet. The transaction will enhance the company's cash flow position and support its dividend. AT&T increased its annual dividend twice in 2010 bringing it to $1.72 and paid a total of $9.9 billion in dividends.

Demerits of the Deal

Given below are some threats to the merger:

Slow Process: This acquisition is the largest in the wireless industry since 2004. It will obviously be a long process from the regulatory perspective and does not guarantee completion.

Excessive Regulation: The acquisition will involve government intervention and inspection as the combination will reduce consumer choices for mobile services. The deal will face a tough review by the Federal Communications Commission and the Justice Department. If regulators approve the acquisition, AT&T might have to sell parts of its business or T-Mobile's business.

Competition and Pricing: In a cutthroat U.S. wireless industry, the price for wireless services will become more competitive post merger. Local market competition is growing among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans. This competition puts pressure on pricing. The 2010 report from the U.S. General Accounting Office stated that the overall average price (adjusted for inflation) for wireless services declined 50% from 1999 to 2009.

Breakup Fee: AT&T will have to pay a breakup fee of $3 billion in addition to some spectrum to the German company, if the deal fails.


We believe the inclusion of T-Mobile operations will position AT&T as the market leader in the U.S. wireless industry. This transaction will further bolster the company's mobile broadband services, which are currently booming. Additionally, the company is expanding its wireless and wireline business, which would in turn fuel profitability going forward.

However, we are currently recommending our long-term Underperform rating supported by the Zacks #4 Rank (Sell) based on competitive pressure as well as a steep decline in its traditional fixed-line phone business. Further, the completion of T-Mobile and AT&T deal contains a number of risks.

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