Verizon and AT&T, already contending with heavy debt and margin pressure, face big bills to build out their wireless networks. Smelling opportunity, smaller rival Frontier Communications last week swooped on Verizon's landlines for about $10 billion. Such carcasses, however, may not leave enough meat for hungry prey.
The timing of Verizon's acquisition of Vodafone's stake in their wireless joint venture for $130 billion, which closed about a year ago, is looking more poorly timed by the day. The four big operators, including Sprint and T-Mobile US, are engaged in a fierce battle for customers, hurting each to varying degrees. Verizon's wireless operating margin, for example, has shrunk by six percentage points over the past year, to 23.5 per cent.
A government sale of wireless spectrum, which just concluded, has added to the pressure. Verizon splashed out over $10 billion for its allocation, and will have to spend heavily so that customers can use these freshly acquired airwaves. It may have even skimped on the future. AT&T agreed to buy $18 billion of licences at the auction, increasing its already hulking balance sheet. A $50-billion deal to buy DirecTV hangs in the balance.
Even so, previous transactions have left buyers choking on bones. Competition is fierce. Customers keep replacing wired phones with wireless ones. Cable operators usually offer faster broadband connections. Hawaiian Telcom, for one, went bust in 2008 not long after paying $1.7 billion for Verizon assets. FairPoint Communications suffered a similar fate a year earlier after a $2.7-billion deal with Verizon. Frontier so far has managed to survive, and even thrive. As more old technology is sure to become available, it will have to prowl carefully.
The timing of Verizon's acquisition of Vodafone's stake in their wireless joint venture for $130 billion, which closed about a year ago, is looking more poorly timed by the day. The four big operators, including Sprint and T-Mobile US, are engaged in a fierce battle for customers, hurting each to varying degrees. Verizon's wireless operating margin, for example, has shrunk by six percentage points over the past year, to 23.5 per cent.
A government sale of wireless spectrum, which just concluded, has added to the pressure. Verizon splashed out over $10 billion for its allocation, and will have to spend heavily so that customers can use these freshly acquired airwaves. It may have even skimped on the future. AT&T agreed to buy $18 billion of licences at the auction, increasing its already hulking balance sheet. A $50-billion deal to buy DirecTV hangs in the balance.
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Verizon is covering some costs by offloading more antiquated assets. It did a similar deal in 2009 with Frontier, selling 4.8 million rural lines for $8.6 billion. The latest $10-billion deal looks attractive financially. Frontier says the divisions will generate over $2 billion in Ebitda this year, meaning Frontier paid a discount to its own public valuation multiple. Moreover, more than a million of the customers it is acquiring use fast fibre connections, so they're less likely to defect to cable rivals.
Even so, previous transactions have left buyers choking on bones. Competition is fierce. Customers keep replacing wired phones with wireless ones. Cable operators usually offer faster broadband connections. Hawaiian Telcom, for one, went bust in 2008 not long after paying $1.7 billion for Verizon assets. FairPoint Communications suffered a similar fate a year earlier after a $2.7-billion deal with Verizon. Frontier so far has managed to survive, and even thrive. As more old technology is sure to become available, it will have to prowl carefully.