On December 16, AT&T (NYSE:T) announced the sale of its Connecticut assets to a regional telecommunications company, Frontier Communications (NYSE:FTR) for $2B. The company is literally exiting its wireline operations in the Northeast, as it seeks to concentrate its operations in markets that align well with its strategy. AT&T's main operations are in the South and Midwest.
AT&T is U.S. largest telecommunications company, and has an estimated market value of $178.32B. It generates about $128B worth of revenues based on its trailing 12-month revenue. The Connecticut wireline business was bringing about $1.2B in annual sales, or roughly just under 1%, which means the sale of those assets is unlikely to move its revenues by a significant margin. If anything, this sale fits well on the company's strategy as it seeks more cash to fund the network upgrades.
But even more importantly, the company is also reportedly eying expansion into Europe and/or Latin America as it seeks to spread to new markets that could offer more room for growth. Additionally, the growth in the wireless communications industry and the demand for high-speed data and connectivity seems to be cannibalizing on the overall wireline market, which means boosting the wireless communications business is of great importance to companies like AT&T.
Its nemesis in the U.S., Verizon Communications (NYSE:VZ), has already depicted its plans for the wireless communications market by acquiring Vodafone PLC's (NASDAQ:VOD) stake in Verizon Wireless. Verizon Communication co-owned Verizon Wireless with Vodafone before the acquisition.
According to reports, many people are disconnecting home phones in favor of wireless services. AT&T's growth and strategy are pegged on the success of its wireless business, and the latest developments suggest that the company is indeed looking to manifest itself within the wireless communications market. Verizon Communications and Sprint (NYSE:S), which was acquired by SoftBank (OTCPK:SFTBF), are also looking to grow their market share in the U.S., which if it happens, will be at the expense of AT&T's share.
This is perhaps one of the reasons the company is looking to expand its services to Europe and/or Latin America as the emerging markets in these regions present even a more lucrative opportunity for growth. Reports in the U.K. already suggest that AT&T is one of the two companies rumored to be targeting to place a bid for U.K.'s Cable & Wireless Communications (OTCPK:CBWYY). Shares of Cable & Wireless Communications jumped 4% on Wednesday following the reports. The other interested party is reported to be John Malone's Liberty Global (NASDAQ:LBTYA).
The acquisition of Cable & Wireless would give AT&T the perfect avenue to penetrating the European and Latin American markets, as it has solid operations in those markets, especially in the Caribbean and Central America region. The U.K.-based company has a market cap of about GBP 1.27B, and an enterprise value of GBP 119.36B.
This equates to P/EV of 0.01x, which shows the richness in the company's assets, despite a low valuation by the market. It is quite obvious that if AT&T was to acquire Cable & Wireless, then the proceeds from the sale of its Connecticut wireline assets would be enough to finance purchase at the current market value. However, I do not expect any acquisition to go through, based on the current market value for Cable & Wireless considering its huge EV. But all the same that remains to be nothing more than a rumor. We will have to wait and see.
Either way, it is now very clear that the sale of the Connecticut wireline assets has been a good business. AT&T's overall operating margin from the wireline business of about 10% based on recent quarter results means that, from the $1.2B worth of annual revenues, only $120M would have trickled down to operating profits, assuming gross margins remain the same across the product range. Considering the diminishing nature of wireline connections, as earlier noted, the growth in revenues from the Connecticut assets sold would have been minimal if any. This means that in order for AT&T to realize operating revenues of $2B from the Connecticut business, it would have taken more than 10 years. And also consider the time value of money. The $2B earned yesterday was a massive deal for AT&T, which also goes a long way to boosting its cash flow.
AT&T has executed a massive deal for its strategy, which is wrapped around funding its network upgrades for high speed data and connectivity. The wireline business in the U.S. continues to experience a gradual decay as more people are now disconnecting from wireline services in favor of wireless services. The sale is also perfectly timed as the company seeks to expand to new markets, which offer more room for growth.
Additionally, the growing competition in the U.S wireless telecommunications market means that boosting the network is paramount, and this is effectively achieved by facilitating seamless upgrades to new technologies. Maintaining the best-in-market, if not at par broadband speeds and network connectivity will assure customer loyalty and growth.
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.