Morgan Stanley On AT&T Acquisition Of Lusacell

Morgan Stanley issued a research note Monday on the acquisition of Mexican wireless carrier Iusacell by AT&T Inc. T.

Lusacell, the No. 3 wireless carrier in Mexico, will be acquired for $2.5 billion.

According to analyst Simon Flannery, the “acquisition provides 20-25 MHz of 800 MHz spectrum, primarily in the southern half of the country, including Mexico City and Guadalajara, and ~39 MHz of nationwide PCS spectrum, covering ~70 percent of ~120M POPs.

“While 8.6M wireless subscribers represents ~10 percent market share, AT&T sees an opportunity to create a one-of-a-kind North American Mobile Service covering 400M+ POPs in Mexico and the United States. We believe that the transaction is consistent with recent comments on Mexico, and, along with DirecTV, may be part of a broader strategy in Latin America.”

The report noted that capex is now expected to be  about $18 billion in 2015, lower than the previous estimate of about $21 billion which “should improve the dividend payout ratio from ~90 percent of free cash flow in 2014e to 70 percent / 75 percent of free cash flow in 2015e.”

Flannery concluded that the “transaction reinforces the competitive nature of the US wireless industry, as AT&T looks for growth outside of the United States. We believe that this transaction is positive for American Tower Corp, which generates ~9 percent of their site leasing revenue from Mexico.”

The firm maintained and Equal-weight rating on AT&T with a $36 price target.

AT&T recently traded at $35.12, up 0.57 percent.