Last week, the U.S. Federal Communication Commission (FCC) announced the results of the latest $20 billion, 600Mhz spectrum auction. Communication companies were bidding for spectrum over which they provide wireless services to their customers. The largest bids came from wireless mobile operator, T-Mobile USA, which spent $8 billion, and U.S. satellite TV provider DISH Network, which spent $6.2 billion. While the auction itself was not particularly noteworthy, this auction was viewed by industry followers and participants as a potential catalyst for wider U.S. telecom and media consolidation. If an acquisition spree is about to occur in the sector, this could have significant implications for bond investors.
Cable consolidation is mostly driven by achieving cost synergies. However, a potential merger wave is not only about synergies. Many of these companies see the strategic importance of offering a full spectrum of services and content to their customers, thereby capturing as much of a customer’s spend as possible, be it via a subscription model or on-demand services. The idea is to achieve triple-play penetration, which refers to when a single provider can bundle a customer’s voice, video and internet services in one offering. Providers also recognise the strategic benefit of adding mobile service/connectivity to their offerings, called quad-play-penetration. Consequently, not only could we see further cable consolidation, but cable operators may look to acquire wireless providers and vice-versa.
Telco and cable companies are also exploring owning their own media content to pipe through the distribution channels that they have established with their customers. AT&T’s recent proposal to buy Time Warner Inc. (and its content creators like HBO, Warner Brothers Studios, etc.) being the most recent example of this vertical integration. It’s all about offering a full suite of communication and content services in one attractive, cost efficient (for the company anyway) bundle to the customer.
These are only a few of the potential strategies that are being contemplated across the TMT universe. Our TMT analysts here at M&G compiled the following diagram that highlights the myriad of potential combinations. The diagram, of course, is purely hypothetical, at least for now, but it highlights the scale and complexity of potential scenarios across the various sub-sectors of the broader industry.
If a merger wave occurs, the implications for bond holders could be significant as well as nuanced. With enterprise values of tens-of, or even hundreds-of-billions of dollars, the purchase prices of many of these assets will be considerable. Any potential acquisition will likely come with a meaningful debt component, meaning a new supply of bonds for a market that already holds a lot of these companies’ bonds. Telecom, Cable and Media companies account for 19% of the Bank of America U.S. High Yield Index including five of the index’s top eleven issuers. These same sectors account for 8% of the U.S. Investment Grade Index. Any additional issuance from these entities is likely to pressure the prices of existing bonds.
For example, the most widely anticipated tie-up surrounds the #3 and #4 wireless operators in the U.S., T-Mobile and Sprint. Whilst not arguing for or against the merits or the likelihood of a combination, such a transaction could have a big impact on the U.S. high yield market. Sprint and T-Mobile are the #1 and #11 issuers in the index with $25 billion and $12 billion respectively in bonds outstanding. Given their weighting in the index many (if not most) high yield investors are likely to be invested in either (if not both) T-Mobile and Sprint. With enterprise values of $65bn for Sprint and $78bn for T-Mobile, one should expect material debt issuance to partly fund any potential transaction. Further, a potential deal could be constructed to preserve T-Mobile’s higher Ba3/BB ratings to the benefit of Sprint’s existing bonds, whereas a more aggressive deal (i.e. a larger debt component) in-line with Sprint’s B3/B ratings could pressure T-Mobile’s existing bond prices.
Further, should an investment grade company acquire a high yield company, the upside for holders of the high yield bonds could be significant whereas the holders of the investment grade bonds could see their bonds weaken if the company decides to tolerate some degree of credit deterioration in order to make a strategic acquisition. Similarly, should a high yield company pursue an investment grade company; downside risk would be prevalent for holders of the investment grade bonds.
The cable and telecom industries in the U.S. are champing at the bit to consolidate and integrate. The recent spectrum auction effectively placed a moratorium on M&A in the space as the industry waited for last week’s auction results. Under a Trump administration, market speculation is that the regulatory authorities’ position on M&A in the sector will soften considerably. With this most recent auction in the books and what is considered to be a consolidation-friendly administration, we may be on the cusp of an M&A feeding frenzy among cable, telecom and media companies which will have significant implications for bond investors.