Telecom Stock Roundup: Verizon to Suffer from Workers' Strike, Polycom Receives New Takeover Bid

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The U.S. telecom industry remained rather subdued last week. Nevertheless, a few developments were worth noting. U.S. telecom behemoth Verizon Communications Inc. VZ warned that the company's second-quarter 2016 financial results may be affected by the ongoing strike of its wireline and cable TV workers which started from Apr 13, 2016.

Verizon and the striking unions, The Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW), are currently at a stalemate over a new labor contract. The company's wireline employees have been working out of contract since August last year. The CWA said nearly 40,000 workers have gone on strike.

Lowell McAdam, CEO of Verizon recently stated thatthe company is currently on track with respect to repairing and maintenance issues of the existing installed bases. However, the number of new installations of FiOS high-speed Internet and FiOS pay-TV has dropped significantly. As a result, the company may suffer high-speed broadband and pay-TV customer attrition. The situation may become even worse going forward if the strike continues for an indefinite period of time.

Meanwhile, videoconferencing giant Polycom Inc. PLCM recently received a new takeover bid from an unnamed private equity PE firm. Notably, IP-based integrated communications solutions provider Mitel Networks Corp. MITL had placed a bid of around $1.96 billion to acquire Polycom this April.

The PE firm offered two options to Polycom. Under Option 1, Polycom stockholders would receive a cash dividend of $11 per share and the private equity firm would purchase $650 million in shares of a new convertible preferred stock of Polycom. Resultantly, the PE firm will get hold of a 56% stake of the company and the remaining 44% will stay with Polycom's existing shareholders. Under Option 2, the PE firm will make Polycom a private entity in an offer worth $11.5 per share in cash and a contingent value right worth up to $3 per share.

Several interesting developments took place outside the U.S. in the past one week. According to a recent report by Bloomberg, Spanish telecom giant Telefonica SA TEF is in talks with several banks to conduct an initial public offering IPO of its infrastructure division Telxius. Telefonica is aiming to raise around €4 - €5 billion ($4.5 - $5.6 billion) from the Telxius IPO. The spin-off of an infrastructure unit is not new in the global telecom space. Earlier America Movil SAB AMX had spun off its Telesite infrastructure division and Telecom Italia SpA TI also opted for the same.

As per a recent report by NextTV Latam, Mexican telecom behemoth America Movil is eyeing Argentina as its new growth area. The report stated that America Movil's owner Carlos Slim recently had a meeting with the Argentine president Mauricio Macri to assess investment opportunities in Argentina's state-owned telecom operator Arsat and Buenos Aires-based cable company TeleCentro.

The deal, if it materializes, may see America Movil acquiring a stake in Refefo Federal Fibre-Optic Network as well as on the Arsat-2 satellite. Notably, America Movil already has a footprint in Argentina's telecom market through its Claro and Telmex Argentina subsidiaries. However, the company is barred from providing pay-TV services under the provisions of the Broadcast Media and Telecommunications Law.

Liberty Global Plc. LBTYA - a leading cable MSO (multi service operator) in Europe and Latin America - recently took over a major Caribbean cable operator – Cable & Wireless Communications Plc. The deal was valued at approximately $7.4 billion on an enterprise value basis. Cable & Wireless will be integrated into Liberty Global's Latin American and Caribbean group (the "LiLAC Group").

Read the last Telecom Stock Roundup for May 12, 2016.

Recap of the Week's Most Important Stories

1.    It is crucial for Verizon to ensure smooth operations and continuing service even in the face of a walkout. Cable and landline revenues, although not comprising a large share of the pie, come directly from Verizon's business customers. In 2015, FiOS generated 29% of Verizon's total revenue and slightly less than 7% of operating income. Earlier this month, the U.S. Secretary of Labor Thomas Perez met with the Verizon CEO and the heads of the two unions that represent the company's striking workforce. Perez requested both sides to sit at the negotiation table to resolve the issues. However, nothing fruitful has emerged so far. (Read more: Verizon Q2 Results Likely to be Hit by Labor Unrest)

2.    Per the Mitel deal, Polycom's shareholders will receive $3.12 in cash and 1.31 Mitel shares for each Polycom share they own, or $13.68 based on Mitel's closing share price on Apr 13, 2016. As a result, Polycom shareholders will own 60% of the combined entity.Although Polycom stated that its board of directors still supports Mitel's offer, it would also evaluate the new proposal to see whether it constitutes a superior offer for its shareholders.  (Read more: Polycom Stock Up on New Takeover Bid from PE Firm)

3.    In Feb 2016, Telefonica created the Telxius division which was assigned the task of managing the company's infrastructure assets. At present, Telxius manages about 15,000 wireless towers and an international submarine-cable network covering 31,000 kilometers (19,000 miles) of Telefonica. More assets are likely to be assigned to Telxius over time. The flotation of the Telxius IPO has become important for Telefonica after the European Union telecom regulator blocked the proposed sale of its O2 unit in the U.K. to 3UK of Hutchison Whampoa. The deal size was around $14.9 billion. (Read more:Telefonica Reportedly in Talks with Banks for Telxius IPO)

4.    America Movil is facing intense competitive pressure in Mexico. We believe the company's expansion drive in Argentina and other international markets is fuelled by the increasing competitive pressure in its homeland. In 2014, the government of Mexico had introduced reforms within its telecommunications sector. The country's telecom regulator, the Federal Telecommunications Institute IFT, seeks to restrict the maximum hold of a company in the market to 50%. However, America Movil currently controls an enviable market share of nearly 68%. (Read more: Is America Movil Looking to Expand in Argentina?)

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5.    The acquisition of Cable & Wireless will enable Liberty Global to boost its rapidly growing operations in Latin America and the Caribbean region. Also, Liberty Global aims to gain from Cable & Wireless' extensive network of undersea cables in the region, given the rapid increase in broadband data consumption. Further, the combined operations will help Liberty Global achieve economies of scale. Moreover, it is estimated to deliver low double-digit rebased operating cash flow growth over the medium term. (Read more: Liberty Global Acquires Cable & Wireless Communications)

Price Performance

The following table shows the price movement of the major telecom players over the past week and the last six months.

Company

Last Week

Last 6 Months

VZ

-1.07%

13.53%

T

0.44%

18.54%

S

-1.40%

-6.12%

TMUS

3.54%

13.93%

VOD

0.18%

1.48%

CHL

3.62%

-3.79%

AMX

-2.13%

-25.55%

CMCSA

3.68%

2.86%

DISH

6.48%

-23.99%

Over the last five trading sessions, share price movement of the major telecom stocks was predominantly positive. DISH Network (6.48%) and Comcast (3.68%) gained substantially while America Movil (2.13%) lost the most.

On the other hand, over the last six months, the price performance of most of the key telecom stocks witnessed a mixed trend. Among the stocks that depreciated most were America Movil (25.55%), DISH Network (23.99%) and Sprint (6.12%). On the contrary, AT&T (18.54%), T-Mobile US (13.93%) and Verizon (13.53%) gained significantly over the last six months.

What's Next in the Telecom Sector?

We do not foresee any significant change in the telecom industry, nor do we see any macroeconomic factors affecting the industry in the coming week. Therefore, we expect stocks to trade in line with the broader market.  

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POLYCOM INC PLCM: Free Stock Analysis Report

MITEL NETWORKS MITL: Free Stock Analysis Report

TELEFONICA S.A. TEF: Free Stock Analysis Report

VERIZON COMM VZ: Free Stock Analysis Report

TELECOM ITA-ADR TI: Free Stock Analysis Report

LIBERTY GLBL-A LBTYA: Free Stock Analysis Report

AMER MOVIL-ADR AMX: Free Stock Analysis Report

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