AT&T is a $207 billion company. Verizon’s market cap is $237 billion. Each has about $20 billion in cash flow per year. $40 billion is a helluva lot of money even for companies that size. Some pundits are panicking.
But Craig Moffett points out the result could be “free cash flow accretive” after tax writeoffs. Spectrum is tax deductible over 15 years. which may be worth more than the ~$800 million per year at today’s record low interest rates.
Tom Marzetta’s Massive MIMO has made 100 MHz of 4G/5G mid-band spectrum fabulously productive. T-Mobile’s Neville Ray is getting 300 Mbps speeds across 100 million homes, almost a third of the US.
T & VZ almost had to buy that spectrum, although how the 280 MHz will ultimately be divided is unknown.
I won’t even try to guess the role played by Dish, T-Mobile, Comcast and perhaps others.
AT&T has to make major changes for other reasons. It has lost $10’s of billions on DirecTV and Time Warner, which should be written off. The dividend should be cut in half or more. It probably should sell some stock to improve the balance sheet and protect the debt rating. Bill Kennard and John Stankey should find the courage to move right now, ahead of earnings. They can blame previous CEO Randall Stephenson.
Verizon also faces a radical challenge to a two decade long business model. Verizon is one of the most profitable companies in the world because many perceive it as the best network. It can charge a premium price.
That is no longer true.
If AT&T simply has to sacrifice $40 billion in market price to cover the auction cost, it would still be a $154 billion company. Verizon would be about a $200 billion outfit. Stock analysts might see that as tragic. I would see them both as remaining large and extremely profitable firms.
Much of the impact is already in the stock price, however. Verizon is down ~$20 billion in two months.
Important: I don’t pick stocks or predict market moves. I’m an industry, not a financial analyst. Really.
I wrote this story because some people are forecasting big drops in investment to fund the auction. That doesn’t make sense, because T-Mobile is pulling millions of customers. The others have to invest to keep up.