Investors typically lose when their stocks acquire other stocks. On the other hand, target stocks tend to perform well, at least until their prices rise to substantially the entire deal premium. Essentially, once the cat is out of the bag, most of the money to be made by investors in an M&A deal comes off the table.
This is bad news for investors interested in wireless and telecom stocks. Are there any stocks that are cheap enough to warrant getting involved in an industry plagued by takeovers?
Sprint on a Shopping Spree
Dan Hesse, the Chief Executive Officer of Sprint Nextel (NYSE:S) is looking to acquire more wireless spectrum after seeing Verizon Wireless (NYSE:VZ) and AT&T (NYSE:T) accumulate the mobile-phone industry's most valuable and costly resource. The company is expected to add new capacity to support its data service from buckling in the future as various users see music and sport videos on phones and tablets. He also said that they are seeking deals with various other companies or sales through government.
After an agreement in October by Softbank to spend $20 billion to take over the company and later in December, Sprint planned to spend $2.6 billion in purchases to seize the control of Clearwire (CLWR). Under the October takeover agreement, the Tokyo-based company would provide the company with $8 billion capital to commence its purchases and investments. The Clearwire acquisition would give the company a strong spectrum position, at least for now. Hesse also said that the company has a very long-term view and plans to acquire more capacity. According to Tolaga Research Chief Research Officer Phil Marshall, the company's options would comprise of acquisition of higher capacity from various smaller carriers such as U.S. Cellular (NYSE:USM) or Leap Wireless (LEAP).
Airwaves are treated as a public good by the US government and divide them up and sell it licenses to various companies such as wireless carriers to utilize them for their communications. As the Federal Communications Commission operates on new frequencies it can offer for sale so it is becoming more difficult and expensive to find such licenses. The company could find gaps in the coverage with the help of extra spectrum and with the acquisition it could add more users which would assist in increasing revenues and scale. The company's desire for acquisitions would depend on its ability to close the deal with Softbank.
Cable Companies Vie for Spectrum
Verizon Wireless acquired airwaves from cable companies led by Comcast (NASDAQ:CMCSA) worth $3.9 billion. Time Warner Cable (NYSE:TWC) and AT&T in order to come for lost ground during its failed takeover of T-Mobile USA as it had signed 50 spectrum deals during the previous year, consisting of a $600 million acquisition of NextWave Wireless and a $1.9 billion agreement to buy spectrum from Verizon Wireless itself. According to Craig Wigginton, Head of Telecommunications Strategy at Deloitte & Touche, "Spectrum availability is a core competitive weapon in a mini arms race."
Traffic on wireless is continuously increasing as more number of people is using smartphones and tablets. During the fourth quarter, smartphones has accounted for 77% of the total retail sales of the company. By 2017, the total mobile traffic is expected to increase 13-fold times throughout the world at a compound annual rate of 66%. In November, to gain network capacity and customers across Chicago and St. Louis from cellular in the US, the company entered into a $480 million deal. According to Hesse, "Given the increases in data usage we are seeing, we will continue to be interested in spectrum as it comes to market. It could be more deals like spectrum from other companies like we did with U.S. Cellular or it could be FCC auctions."
Dish Network (NASDAQ:DISH) said more information is required on Softbank by U.S. regulators related to $20 billion purchase of the company, which is vying with Dish for control of Clearwire. More information is required by the Federal Communications Commission, about the consequences of placing airwaves in the US under foreign control such as Softbank. Dish is planning to expand their mobile-phone service to bid for Clearwire, an operator of wireless-network with valuable spectrum. Sprint, which owns approximately 50% of Clearwire, has agreed to purchase the remaining at $2.87 per share. Dish has offered $3.3 per share.
In a filing to the FCC, Clearwire shareholder Crest Financial said that it should block the proposed merger as it undervalues Clearwire's shares and will also harm the public as the combined company can leave waves under-used. The company would surrender its rights as a Clearwire shareholder to allow Dish's bid to be completed.
Clearwire has become the object of a bidding war. The company is determined to take a minimum of $80 million in financing from Sprint in March 2013, this decision of the company may hinder a rival bid from Dish. The financing would be part of the $800 million financing that Sprint has extended to Clearwire when it has agreed to buy the company's shares for $2.97 per share. The company has already lost the right to January and February installments and has not decided till now whether it would take more than one month of payments. According to Walt Piecyk, an analyst with BTIG, "The ball now moves into Charlie's court. Either he modifies his offer or backs off to see how the minority shareholder vote goes."
More than 50% of the Clearwire is owned by Sprint. Sprint is trying to purchase the remaining shares so that it can use Clearwire's airwaves to increase its own network. However, Dish offered a higher price and is more complex as well as it may require Sprint's consent for being completed. Dish also said that hat its offer would require Clearwire to end its financing agreement with Sprint.
United States Cellular is attractive:
EPS Growth Next 5 Years
United States Cellular
Time Warner Cable
It is trading at a discount to its book value and is not loaded with debt. If it becomes a takeover candidate its price multiples could swell to those enjoyed by Clearwire. Leap is a little more of a stretch considering its debt burden.
Investors who wish to gain a foothold in telecom and wireless stocks should consider United States Cellular and Leap Wireless. Each is cheap and either may end up cashing out upon a future takeover.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.