Moody’s: Telecom M&A to Continue

Credit rating agency Moody’s Investors Service predicts that mergers & acquisitions activity among telecom companies will continue as the industry seeks to offset low revenue potential and intensifying competition with deals.

Already the sector has seen AT&T announce a $108.7 billion deal with Time Warner in October and Century Link make a $34 billion offer for Level 3 Communications. Moody’s sees more deals ahead.

“Market saturation and tough competition have produced a stagnant US telecom market,” Moody’s said in its report. “Yet regulators remain unlikely to approve consolidation within the traditional telecom sector, especially for large incumbents, so they must look elsewhere for growth.”

Moody’s predicts that in the wake of those deals, Verizon Communications will likely accelerate its 5G mobile video strategy either through large scale M&A or partnerships.

“In our view, Verizon’s existing wholesale agreement to provide wireless infrastructure for several large US cable companies could be expanded upon for 5G in a mutually beneficial way,” Moody’s wrote.

In other possible deals, Sprint could make another attempt to merge with T-Mobile, but Moody’s believes regulators will probably squash that transaction again, unless they can prove combining the No. 3 and No. 4 wireless companies provides a public benefit by creating a company that can better compete with Verizon and AT&T.

While there has been great speculation recently regarding what Verizon will do in the M&A space, including a possible pairing with Charter, Moody’s said it doesn’t expect any blockbuster news from the phone company just yet.

“We don’t expect Verizon to pursue a mega-deal like AT&T, but think that Verizon could seek an alternative path to wireless product differentiation by leveraging partnerships to accelerate its 5G strategy,” Moody’s said, adding that it could expand its MVNO agreements with cable operators to include 5G.

“This potentially mutually beneficial arrangement would allow Verizon to leverage the cable operators’ dense backhaul assets in exchange for competitively priced wireless infrastructure,” Moody’s continued. “The cable operators would avoid very costly wireless investments and, at the same time, Verizon would prevent a new retail competitor to its wireless business. It would also place AT&T at a stark competitive disadvantage to Verizon for 5G wireless services.”