The way to understand the US wireless market is through capital spending. Last year, AT&T sunk $11bn into its network and Verizon Wireless spent $9bn. Second-tier Sprint spent under $5bn, and T-Mobile under $3bn. Capex per customer is near parity, but because many costs are fixed, total spending counts. On the profit side of the ledger, the disparity is greater still. The big dogs are fighting it out and the little dogs eat scraps.
Consolidation should help, in theory. The latest attempts focus on Sprint: satellite TV provider Dish and the Japanese carrier SoftBank have made offers. The combination of cash and shares offered by Dish is richer; Dish owns undeveloped wireless spectrum the two could develop together, and commercial operations of the two could be merged to create savings. Dish-Sprint will, however, be left with more than $40bn in net debt, almost five times projected earnings before interest, tax, depreciation and amortisation. Sprint, majority held and recapitalised by SoftBank, would have a ratio under three and would therefore bring some financial flexibility into the fight.
But a few points should be made in Dish’s favour. It generates $1bn in free cash flow a year. Within a few years the cost savings could contribute, conservatively, another billion in cash flow. And the new company could finance the $9bn in new debt – in the short term – at a net cost of just $250m or so a year.
If Dish spent $1bn a year paying down debt, got a billion in Ebitda out of cost cuts, and grew a bit organically, its leverage ratio could drop to three times in three years.
But money spent paying down debt is money not invested. And Dish would also have to build out its spectrum, and staunch the losses at Clearwire, Sprint’s subsidiary, at the same time.
Should Dish overcome these barriers and win Sprint, a wide spending gap will remain with the big boys. Yet the gap will be only marginally narrower under Softbank. Consolidation better not stop here.
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