So the big news in the wireless telecom market is that AT&T (T) has abandoned its $39 billion bid for T-Mobile USA from Deutsche Telekom (DTGEF.PK). The obvious fallout from this is that AT&T will of course have to pay the $4 billion breakup fee, which will allow T-Mobile to reduce debt, upgrade its network and add liquidity to the balance sheet which will enable T-Mobile USA to scout for deals of small and medium size. Outside of the obvious, the ripples from this event will most surely be felt by many within the industry.
Sprint (S) is the player in the wireless carrier market most affected by this. Sprint is the number three player in the market and T-Mobile is the number four, so if the number two player, AT&T, were to buy the number four, Sprint would have been a distant number three in the market, dwarfed in size by both AT&T and Verizon. The company's shares jumped after hours to reflect the dropped bid, and reverses a trend many in the industry thought would leave Sprint behind - consolidation.
The reversal in trend of the biggest carriers getting bigger in the industry also dilutes to an extent the recent transaction between Verizon (VZ) and cable operators, which had their interests previously aligned with those of Sprint, or so the markets thought. This event gives S some further time to move forward with its network upgrade and build-out, and figure out what exactly to do with Clearwire (CLWR).
Which brings us to Clearwire, the semi-independent for what seems to be accounting purposes only a network. Clearwire's equity is majority owned by Sprint, however due to the high debt load and weak balance sheet, Sprint has elected to give up board seats it is entitled to in order to not have to report consolidated financial statements.
Clearwire was thrown a life raft by Sprint early this month to help fund the continued rollout of its wireless network and to enable the company to upgrade to 4G LTE. Also of interest is the fact that now other carriers may be forced to come to Clearwire and either lease spectrum or, more likely, pay for network backhaul. Sprint probably could kill any deal, but this still enables Clearwire the ability to add further customers in areas where spectrum is at a premium (think San Francisco, New York and Chicago for instance). Like Sprint, Clearwire's shares perked up in after hours trading last night, effectively wiping out that days losses in regular trading.
Another wholesale supplier of network capacity/data services is Towerstream (TWER). Towerstream owns wireless networks in America's largest metropolitan areas, including those which are running at or near network capacity for the big boys Verizon Wireless and AT&T. The company has been promoting its service in Manhattan over the past year, and one of the persistent rumors has been that AT&T was testing this network in order to offload data usage onto this network to free up capacity on its own network. Yesterday TWER shares popped after announcing a deal with Skype (read Microsoft (MSFT) here to realize the significance) for its network. With the company currently at break-even any additional customer additions and off-take agreements basically hit the bottom line. If all of the wireless carriers need extra spectrum to increase the reliability of their networks, TWER could be a good short-term option to boost capacity in the largest U.S. cities until major carriers are able to increase network capacity to meet the ever growing requirements by smart phone users.
This morning analysts are discussing the need for T-Mobile USA to merge with a Sprint now in order to get the scale they need to be successful in the industry. There are other options out there for the smaller players, including TDS's (TDS) U.S. Cellular (USM) unit (about 81% owned by TDS) which has a presence in rural America and the Midwest, especially the Chicago and Milwaukee metropolitan areas. USM has a tiny market capitalization. According to Yahoo Finance it is roughly $3.6 billion - or less than the breakup fee (pre-tax) that T-Mobile USA received from AT&T. USM does not solve anyone's network issues on a country-wide basis, however it is in enough markets and attractive enough ones where it would not be a liability. The network is CDMA based, which also limits its suitors. But the number six player could be a viable option if consolidation within the industry is moving from the big national players down to the smaller national carriers and regional players.
At the end of the day AT&T dropped the ball, cost shareholders $4 billion and made investors realize that there is life in some of these other cellular plays. We should see many of these smaller players' shares reinflate and get back to the previous premiums they traded at prior to the deal.
The AT&T/T-Mobile USA deal seemingly changed the landscape and had players such as Sprint trying to reinvent the wheel. With new life given to these plays, 2012 should be an exciting year in the industry as everyone tries to expand their networks while at the same time upgrading to handle the current smart phone revolution.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.