The Sunday Brief: Who Had Their Vacation Cancelled This Summer (and why)? 12 August 2012

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Dec 12, 2013 (3 years and 4 months ago)

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The Sunday Brief:
Who Had Their Vacation Cancelled This Summer (and why)
?


12

August 2012


Greetings from Dallas
, where the heat wave continues


Texas style.

With
the summer comes vacations, and, while most of us had the opportunity for
a brief getaway, several companies/ individuals have been bombarded with
activity this summer and your efforts have largely gone unrecognized, until
now.


Before we dig into

four examples of those who had to work straight through the summer of 2012, let’s
update a few of the trends we have been developing

over the past few months
. First, the thesis that
the
local telephone provider
DSL plant is under assault from carrier, bu
siness and consumer
disconnect
ion

activity

is alive and well. As several of you reminded me this week, this does not mean that the Central
Office infrastructure is dead or obsolete, but that it will need to be repurposed more quickly. However,
bypassing
the Central Office entirely is the new and preferred design for redundant networks
, and th
at
certainly limits the upside of any traditional infrastructure.


To the
thesis
of
using the current low interest rate environment to generate shareholder value
, I

neglected to mention the updated refinancing information provided by AT&T in their latest
10
-
Q

(which
was released on August 3)
. Here’s the excerpt from that report:


Cash Used in or Provided by Financing Activities

For the first six months of 2012, our financing activities included proceeds of $6,935 from the following:

• Februa
ry 2012 issuance of $1,000 of 0.875% global notes due 2015, $1,000 of 1.6% global notes due 2017, and $1,000 of 3%
global notes due 2022.

• May 2012 issuance of £1,250 of 4.875% global notes due 2044 (equivalent to $1,979 when issued).

• June 2012 issuance

of $1,150 of 1.7% global notes due 2017 and $850 of 3% global notes due 2022.


During the first six months of 2012, debt redemptions totaled $7,021 with a weighted average interest rate of 5.68% and
consisted of the following:

• February 2012 redemption o
f $1,200 of 6.375% senior notes due 2056.

• March 2012 redemption of $1,000 of 5.875% notes due August 2012.

• June 2012 redemption of $800 of 4.75% notes due November 2012, $2,500 of 4.95% notes due January 2013, and $1,500 of
6.7% notes due November
2013.


The bottom line here is that AT&T, through this batch of refinancing, was able to save about $200
million annually in interest charges and lower the average coupon rate to 2.81% from 5.68%.
Think of it
as the 50% off sale for AT&T’s Treasury depart
ment. S
avings from lower debt costs purchases more
shares and potentially funds a higher dividend payment. It’s a “rinse and repeat” activity that, if used
for the remaining $57 billion of AT&T debt, could finance a meaningful portion of their increased
share
repurchase.


Without a doubt, the treasury departments of many in the telco community have had their vacations
shortened if not
cancelled this summer

(see last week’s Sunday Brief for more details)
. On top of the
refinancing activity last week,
Sprint announced a $1.5 billion offering

with a 7% coupon which attracted
interest only because they indicated that one of
the possible uses of the proceeds would be for

potentia
l funding of Clearwire Corporation and its subsidiary Clearwire Communications LLC.”

Anyone
who has been following the Sprint/ Clearwire saga is not surprised by this disclosure, but that certainly
did not
keep
the
pundits from speculating that this activ
ity, in addition to the announced departure of
Sprint’s strategist and corporate development head
Keith Cowan

and
c
omments made this week

by CEO
Dan Hesse about the need for increased consolidation must mean that Sprint is contemplating
something big.


One offering of $1.5 billion does not an M&A strategy make. Sprint’s focus
will continue to be
on the
deployment of

their next generation network (Network Vision), which, by
most
reports, is going well. In
order to make Network Vision a reality, Sprint will need to repurpose some of their voice and data needs
to the 800MHz band. This spectrum is currently being used
by Nextel and will not be available
nationwide to Sprint customers until
mid to
late
2013.
Prior to widespread availability, one way to
continue to satisfy increasing needs for data is to use
Clearwire
’s
2.5 GHz spectrum
.
As Eric Prusch
announced in Clearwire’s earnings call in late July
, they are currently readying 1,800 cell sites of LTE
-
Advanced
-
re
ady

for Sprint (and other wholesale customer usage) by the end of the second quarter of
2013.
Bottom line:

If the Clearwire launch of
A
dvanced
-
ready sites go
es

well, it would not be surprising
to see Sprint accelerate Clearwire’s LTE
-
Advanced deployments
, particularly in spectrum
-
constrained
markets.

This week’s debt placement
secures

that option.


While we have identified two groups of individuals who have been very busy this summer


telecom
treasury departments and the Sprint/ Clearwire joint engine
ering group, there are plenty of others who
have been burning the midnight oil and earning “fluorescent tans” in 2012.

There are two integration
teams to note here that could make a real impact in 2013 depending on their summer activity. First, as
we not
ed in one of last month’s Sunday Briefs,
Verizon purchased Hughes Telematics in June for $612
million
. This acquisition was completed in late July.


Hughes
b
rings a treasure trove of M2M solutions to
Verizon Business

(it’s interesting to note that
Hughes will be managed as a separate en
tity and not be directly managed by Verizon Wireless), most
notably the automotive/ connected car segment
. Note:
for those of you who forgot, Hughes was a
t

one
time a part of General Motors. How
ever, as was pointed out by the folks at Computer World, Hug
hes
also has investments
in
Lifecomm
, one of the leaders in the development of “wearable M2M.”

Both the
integration of Hughes’
current capabilities as well as their expansion into other vertical areas of the
Verizon Business portfolio will drive
shareholder
value for Verizon’s latest acquisition.


In the area of core infrastructure, a team from Zayo is working feverishly on the i
ntegration of AboveNet
into their core connectivity portfolio.
While Zayo is no stranger to acquisitions, this one is by far the
largest ($2.3 billion including debt) and the most expansive. On a pro forma basis, Zayo has nearly $1
billion in annualized
revenues and $530 million in annualized earnings before interest, taxes and
depreciation (commonly known as EBITDA).
The combined company will operate in 45 states and 7
countries covering 61,000 route miles.
Also, as a result, the company will have ~ $3
.5 billion in total
debt.


Zayo, while private, is not a wallflower in the industry. Dan Caruso, Zayo’s founder, saw the demand for
infrastructure and the need for a consolidated national (and global) approach
to both cell tower
backhaul and enterprise wavelength and Ethernet access as early as 2005
-

far ahead of anyone else in
the industry. The AboveNet acquisition takes Zayo into a services layer, however,
an area that Zayo has

historically not pursued. Th
e translation of significant
fiber and collocation
assets into synergistic value
will be the easy part for the Zayo team
. T
he transformational impact of operating a large IP backbone

and managing secure Virtual Private Networks for large enterprises and c
arrier wholesale organizations
wi
ll be challenging. Completing the first integration phase by the end of 2012 will be critical.


Telecom treasury departments, the Sprint/ Clearwire joint engineering group, as well as the Verizon
Business/ Hughes Telemat
ics and Zayo/ AboveNet integration teams have all had busy summers


no
doubt about it. However, next week’s Sunday Brief will cover small cells, which present both the
greatest opportunity to utilize current spectrum as well as the greatest headaches in
the industry.
Doing
small cells right involves rethinking current RF planning techniques, understanding how to manage
capacity at the building level, and achieving new levels of cross
-
carrier partnerships. Apologies in
advance


next week’s column will b
e slightly longer than normal, but well worth your time.


By the way
, i
f you have a friend who would enjoy
receiving

this brief, please send an email to
sundaybrief@gmail.com

and we’ll get them on the list.
T
hanks for your help
,
continued readership and
comments!


Jim Patterson

Patterson Advisory Group

816.210.0296 mobile

Jim@pattersonadvice.com


Twitter:
@Pattersonadvice