One of the largest projects the management team at AT&T (NYSE:T) is working on right now that few people know about is the firm’s extensive development of infrastructure and network assets that falls under its FirstNet contract. In just the few short months that the company has been working on it, it has already seen significant signups, and as time goes on, the business will see far more. Over the next few decades, management is set to invest tens of billions of dollars into this work, and in the long run, it should establish for itself a nice monopoly of sorts over high-speed first responder communications.
Back in 2012, the government decided to invest in establishing and maintaining a nationwide network of telecommunications assets geared toward providing first responders and other emergency personnel with high-speed communication capabilities. The cost for such a project was estimated to be significant, with the GAO (Government Accountability Office) figuring it could cost the government up to $47 billion over a 10-year period, and tens of billions of dollars on top of that over the ensuing decades, to achieve its goal. Though not always a successful approach, the government decided in this case that instead of burdening the taxpayer to pay for this, it would instead partner up with a private company. Enter AT&T.
In 2017, FirstNet designated AT&T as its private partner in this project. In accordance with the terms the two parties arrived at, FirstNet will contribute, over a five-year window and subject to the completion of certain milestones by AT&T, a sum of $6.5 billion. In addition to this, the organization will provide AT&T with 20 MHz in the 700 MHz band (known as Band 14) of radio-frequency spectrum. AT&T, meanwhile, over the 25 years of the contract, will build out a network with assets totaling at least $40 billion. In 2018 alone, FirstNet allocated almost $1.7 billion toward asset development. This is on top of the $0.3 billion capitalized by the organization in 2017 that was paid in 2018. It’s also important to point out here that not a penny of taxpayer dollars went into FirstNet. The organization, instead, raised $7 billion through the sale of spectrum.
The goal of this network is to allow a system whereby first responders, no matter where in the country they are and/or what weather conditions are like, may be able to have access to near real-time information and communicate with any parties they feel the need to communicate with. One example of the network (even as early-stage as it is today) in action came during Hurricane Florence last year. During that disastrous time, AT&T equipped hotspots to various devices in South Carolina, deployed a SatCOLT (Satellite Cell on Light Truck) in North Carolina, and deployed a COW (Cell on Wheels) to FEMA staging areas. In fact, during that time frame, the company deployed 24 COWs and COLTs, as well as more than 50 drones aimed at assessing the damage from the storm.
What’s more, first responders in the area as well as those traveling there to help were spared data throttling that can happen when other networks become stressed. These are just some of the assets the company has that it has dedicated to this network. A recent addition to the roughly 75 different assets has been a third Flying COW (Cell on Wings), which is essentially a drone that can beam LTE coverage to responders at the scene of disasters. Each Flying COW can fly up to 400 feet into the air and can handle wind speeds of up to 25 mph.
Given the disparity between how much the government is contributing and how much AT&T is dedicating toward this project over time, it might be difficult to see the value for the company in this partnership. The catch here is that, when the network is not being used by first responders, AT&T has the right to repurpose the spectrum for its own commercial needs. Any amount required by first responders will always take precedence, but it’s likely that most of the spectrum at any given time will be used for commercial purposes. Last year, in connection with tapping into the spectrum, the company had to pay to FirstNet a sum of $240 million ($120 million for FirstNet’s fiscal year ending in September and another $120 million shortly after the fiscal year’s end).
Even though the FirstNet network is still in its early stages of development and deployment, the impact so far has been massive and the adoption even more so. According to a recent press release issued by AT&T, the company has, today, over 600,000 connections for the network. These are spread across 7,250 public safety agencies nationwide, including FEMA, fire departments, ambulatory services, and more. To put this in perspective, in a press release issued on June 21st of 2018, it was revealed that there were only 1,000 public safety agencies that had signed up to the network. Collectively today, the service already reaches over 600 markets nationwide and this is due, in part, to management successfully adding over 50,000 square miles of LTE coverage (about the equivalent of Louisiana) last year alone.
As telecommunications assets grow and become more technologically sophisticated in this age of IoT (Internet of Things), it can be expected for the types and quality of devices to expand as well. Due in part to technology but also because of manpower required for operating the assets in question, it’s believed that this partnership could create more than 10,000 jobs throughout its 25-year term, and if AT&T can manage its obligations effectively while making optimal use of the spectrum it has been given access to, it’s likely the company can entrench itself as an even longer-term partner here.
What AT&T is working on here is truly remarkable. Through this public-private partnership, stakeholders in the business are poised to benefit, whether it's the taxpayer in the form of service without having to put any taxpayer money in, or whether it’s AT&T through increased prestige and its ability to capitalize on the spectrum that has been allocated to it. While it will likely be years before the full financial impact on AT&T is known, it’s difficult to imagine this scenario negatively affecting the business. Instead, it will very likely serve as yet another source of attractive value-creation for the company and its shareholders over time.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we 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.