US telecoms: The abandonment of traditional telephones in favour of mobiles is bad news for telecommunication companies. US operators could lose more than 8m landlines this year, according to Sanford Bernstein. Wireless divisions won’t save telecoms entirely from margin compression. And those that don’t offer mobile service are in real trouble.
True, in urban areas where Verizon and AT&T are laying optical fibre, their fixed-line businesses are doing relatively well. Customers like super-fast internet connections, and the companies can pump bundles of services such as voice and television through it. But in rural areas, fibre is prohibitively expensive to lay, and customers without high-speed service options have more reason to rely solely on a mobile phone.
Verizon and AT&T won’t escape unharmed. Verizon is spending about $4,000 per customer to lay fibre. Cable companies with similar networks are valued at only about $1,000 per customer. And margins in their wired businesses, which include high speed fibre, have slowly dropped for several years. That’s bad because those divisions account for more than half of their revenues. And when businesses like these with high fixed costs see customers defect, margins can contract quickly and even go negative.
Worse off are US telecom companies such as Qwest, Frontier and Fairpoint, which lack wireless operations and are heavily indebted.
Their declining cash flows make their debt hard to service, and can cause their equity values to plummet. Unfortunately, it’s become harder for these businesses to offload assets to repay debt. Valuations for access lines are falling. And forced sellers often find it hard to fetch a decent price on other assets, especially when the obvious potential buyers are pulling in their horns. For example, Qwest just called off its attempt to sell its long-distance data business when bids fell far short of the $2bn to $3bn it sought.
These companies have already taken big hits. Fairpoint’s stock has fallen about 70% over the last 12 months and Hawaiian Telecom, which Carlyle bought in 2005, filed for bankruptcy at the end of last year. Yet Quest and Frontier’s stocks both still trade at more than 10 times estimated 2010 earnings. Since there’s little chance customer defections from wired telecom businesses such as theirs will stop, their stocks could have much further to fall.