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Cell tower companies see little to fear from T-Mobile/Sprint merger

Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Technology, Media & Telecom

Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors


Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Cell tower companies see little to fear from T-Mobile/Sprint merger

The pending merger of T-Mobile US Inc. and Sprint Corp. will result in fewer cell towers, but the major U.S. tower companies expect increased network infrastructure investment in the ramp up to next-generation 5G technology to make up for any difference in revenue.

In the weeks since Sprint and T-Mobile shared their merger plans, the stock prices of the three largest U.S. tower companies — American Tower Corp., Crown Castle International Corp. and SBA Communications Corp. — have all remained relatively stable. While the companies are not equally exposed to the T-Mobile-Sprint deal, tower company executives at all three estimated that any negative revenue impact would be relatively small and short-term, and analysts said that Sprint and T-Mobile's merger plans call for fewer towers to be decommissioned than feared.

As of the close of May 16, shares in American Tower were up nearly 1% since April 27, the last day of trading prior to the deal announcement, while shares in Crown Castle were up almost 2% and shares in SBA were down less than 1%. After years of on-again, off-again negotiations between Sprint and T-Mobile, analysts said investors had already braced themselves for the carriers' pending combination, muting the transaction's impact on tower stocks.

New Street analyst Jonathan Chaplin said in a research report that the three tower stocks, all of which are organized as real estate investment trusts for federal income tax purposes, had been underperforming the MSCI US REIT Index by several hundred basis points since April 10, when deal chatter first resurfaced in the press. "Most of the downside has been largely priced in already … especially accounting for the uncertainty around the deal gaining regulatory approval," he said.

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Following the merger, T-Mobile President and CEO John Legere said the combined entity would initially have 110,000 macro tower sites. As the networks are integrated, 35,000 of those existing sites will be decommissioned, while 10,000 new sites will be created.

"Then you ultimately have about 85,000 macro sites and 50,000 small. So it's a massive network," Legere said.

MoffettNathanson analyst Craig Moffett said he had expected Sprint and T-Mobile to decommission more macro sites, ending with a total of 80,000 rather than 85,000.

"From a tower perspective, the math appears to be a bit less punitive than it did before we could hear from T-Mobile and Sprint about their network and investment plans," Moffett said in a research note.

Moffett said he believes American Tower is the "best positioned" ahead of the deal. He estimates the company derives 16% of its total site leasing revenue from Sprint and T-Mobile, while Crown Castle and SBA each derive more than 30% of their leasing revenue from the two carriers.

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American Tower's business is also much larger than the other two tower companies, ending the first quarter with 159,077 wireless towers, as compared to the 40,053 operated by Crown Castle and 28,309 from SBA.

During American Tower's first-quarter earnings conference call, Chairman, President and CEO James Taiclet said the Sprint/T-Mobile combination would be "neutral to positive" for American Tower's U.S. business.

"The disclosed plans for the combined entity to spend $40 billion in network and other capital investments over the next 3 years would represent a substantial increase in spending relative to the recent average annual combined spending of the two companies," Taiclet said.

In regards to the tower sites the companies plan to decommission, Taiclet said there will be a "significant" opportunity for American Tower to amend its existing rental agreements with the combined company to add new equipment on the remaining towers to support the new entity's spectrum portfolio.

"So while there may ultimately be less total transmission sites in the merged network, each site is likely to have more spectrum bands, more data traffic and more equipment installed," the CEO said.

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Crown Castle CFO Daniel Schlanger also sought to assuage concerns around the impact of the deal, saying during an earnings conference call that while Crown Castle derives 19% of its revenues from T-Mobile and 14% from Sprint, only 5% of total revenues come from towers where the two carriers have overlapping equipment.

Similarly, SBA CFO Brendan Cavanagh said during a May 15 investor conference that a "worst-case scenario in terms of potential risk" is that SBA Communications could lose "north of 5%, close to 6%" of its revenue due to overlapping sites between Sprint and T-Mobile. He also said any revenue losses would be spread out "over an extended period of time," adding, "Really, the net impact should be much, much less than that."

Cavanagh said he would rather see three well-capitalized nationwide networks than four that are spending more conservatively.

"Our four carriers haven't really been actively spending for years. So if you have three strong carriers that are … committed to investing competitively in their networks, I think we'll be just fine in terms of the outcomes of this," he said.

Technology, Media & Telecommunication
Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets


A federal judge approved the AT&T – Time Warner Merger, setting the stage for a frenzy of media consolidation. First up: a bidding war over 21st Century Fox.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Jun. 14 2018 — A U.S. district judge on June 12 approved AT&T Inc.'s acquisition of Time Warner Inc. with no restrictions, which should open up the media M&A floodgates in a world that is increasingly moving toward digital consumption of content. First up to bat: competitive bidding for most of 21st Century Fox Inc.

Comcast Corp., emboldened by the decision that the merger did not violate antitrust laws, offered on June 13 to purchase most of 21st Century Fox for $79.17 billion in cash, a 19.7% premium to Walt Disney Co.'s stock offer of $66.14 billion, worth $68.36 billion based on the close of Disney's stock June 13.

On a cash flow basis, the deal would be expensive, at 14.1x 2018 cash flow, although this drops to less than 10x when $2 billion in synergies are factored in.

Although the offer from Comcast is attractive, we think a competing offer that allowed shareholders to choose cash or stock may have been more attractive to some shareholders that have a low basis in their shares. Since this deal was widely expected to be announced, Disney has had plenty of time to consider whether it will bid higher, and if so, if it will do so with a mix of stock and cash. Should the board decide Comcast has the better deal, Disney would have five days to come up with a counter offer.

As the table below shows, the regional sports networks are the most expensive piece of the company, valued at an estimated $19.14 billion in the Comcast offer.

Disney-Fox deal: What will the Department of Justice think?

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Listen: Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

The following post comes from Kagan, a research group within S&P Global Market Intelligence. To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

In this second episode of Kagan MediaTalk, senior research analysts Justin Nielson and Tony Lenoir discuss the upcoming FIFA World Cup, to be held in Russia June 14-July 15, and what soccer's biggest international stage means for the U.S. TV ecosystem.

In addition to being hosted on Soundcloud this podcast is also available on iTunes, Stitcher, and TuneIn.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).

Credit Analysis
50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Jun. 11 2018 — The year 2018 marks the 50th anniversary of the Altman Z-score, which was designed to gauge credit strength of publicly traded manufacturing corporates. Until this day, the model has been used by financial practitioners to obtain a condensed picture of the financial strength of a company, and serves as a benchmark for credit risk assessment models.

As a part of providing data and tools for a comprehensive analysis of credit risk, S&P Global Market Intelligence has developed a family of PD Model Fundamentals (PDFN). The PDFN is a statistical model that produces probability of default (PD) values over a one- to more than thirty-year horizon for public and private banks and corporations of any size. The model maps the PD values to credit scores1 (i.e. ‘bbb’), based on historical observed default rates (ODRs) extracted from S&P Global Ratings’ database (available on CreditPro® ) PDFN also offers a global coverage of over 250 countries and more than 20 segments, regions, and industries.

PDFN incorporates both financial risk and business risk to generate the overall PD value. This innovative approach captures, in a statistical PD model, important credit risk drivers as identified by S&P Global Ratings’ extensive experience in corporate credit assessments, and provides users with a well-rounded measure of credit risk, where different sources can be easily identified.

We apply the credit assessment metrics to analyze one of the most publicized bankruptcy events in the last decade, the case of General Motors (General Motors Company, formerly General Motors Corporation). In Figure 1 we present the historical evolution of credit risk for General Motors (GM) from January 2005 to May 2018, accompanied by bankruptcy related Key Developments. We compare assessed credit score by PDFN, Altman Z-score, and corresponding S&P Global Ratings Issuer Credit Rating.

At the beginning of 2005, PDFN indicates a credit risk score of ‘bbb-‘, while the S&P Global Ratings Issuer Credit Rating is ‘BBB-‘. The credit risk score indicates that General Motors had adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Likewise, the Z-score indicates a rather problematic financial situation, placing General Motors in distressed zone category.

In the following months, the credit quality of General Motors rapidly deteriorated. PDFN signals highly increased probability of financial distress already at the beginning of 2007, more than two years in advance. The implied ‘ccc’ credit score suggests high vulnerability to adverse business, financial, or economic conditions with at least a one-in-two likelihood of default. A few months before default, PDFN indicates a credit score of ‘cc’, thus expecting default to be highly likely. Similarly, the S&P Global Ratings Issuer Credit Ratings shows decaying credit quality, albeit the credit rating changes are more sporadic and have larger increments. The Z-score starts to show a significant deterioration of credit quality one year prior to default, but with a notable lag in comparison with PDFN.

After completion of the post-bankruptcy reorganization, creditworthiness of General Motors improved, and PDFN indicates a fairly stable credit risk profile with an implied score of ‘bbb’. In comparison, S&P Global Ratings Issuer Credit Rating initially shows a greater conservatism in light of the reorganization processes. Since then, the credit rating has improved steadily, converging with PDFN estimate. Z-score shows a somewhat steady estimate of credit risk, with a slight deterioration in the recent years.

Figure 1: Historical evolution of credit risk for General Motors (GM)

The shaded area denotes the period of reorganization between the bankruptcy announcement and reemergence of General Motors (GM) as a public company on the New York Stock Exchange (NYSE). Dashed vertical lines denote bankruptcy related Key Development (see corresponding numbers for details). The Z-score scale has been selected to match the credit score level at the beginning of the period.

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

General Motors (GM) – Key Developments:
(1) Nov 8, 2008: GM heads towards bankruptcy
(2) Dec 31, 2008: GM expects to receive $13.40 billion in funding from U.S. Department of The Treasury.
(3) Feb 14, 2009: GM contemplates bankruptcy
(4) Jun 1, 2009: GM filed for bankruptcy
(5) Nov 17, 2010: GM has completed an IPO and starts trading on NYSE

PDFN incorporates both financial and business risk dimensions to generate an overall PD value as well as an assessment of each individual dimension (financial and business risk). It also comes equipped with a useful analytic tool, the contribution analysis, which allows users to identify drivers of risk, in absolute or relative terms, to define potential paths to creditworthiness improvement or deterioration.

Figure 2 presents the current credit risk profile of General Motors as provided by the PDFN based on last twelve months of data. The contribution analysis indicates that overall business risk is strong, but the company’s financial position is aggressive and is currently the main driver of overall PD estimate. A deep dive analysis shows a weak total equity position which in addition to profitability (EBIT/Total Assets) and efficiency (EBIT/Revenues), resulting in limited financial flexibility (Retained Earnings/Total Assets), represent the risk factors with the largest driver for the assigned credit risk score for General Motors.

Figure 2: Credit risk profile of General Motors (GM)

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

This case study exemplifies the value of PD Model Fundamentals, in providing predictive insights into companies’ creditworthiness and dynamic estimates of PD value and mapped credit score. Our model was trained and calibrated on default flags and is able to signal deterioration of credit quality well in advance of the actual bankruptcy event. The combination of both financial risk and business risk enables a comprehensive overview of a company's creditworthiness, while also providing an in-depth review of a company's credit risk profile to identify and distinguish the main sources of risk. S&P Global Market Intelligence leverages leading experience in developing PD models to achieve a high level of accuracy and a robust out-of-sample model performance. The integration of PDFN into the S&P Capital IQ platform allows users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain PD values for single or multiple companies, and perform a scenario analysis.

1 S&P Global Ratings does not participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the uppercase credit ratings issued by S&P Global Ratings.

Companies And Sectors Most Impacted By U.S.-Chinese Tariffs

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Credit Market Pulse March 2018 Issue

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Webinar Replay: Outlook On Credit Markets And The Implications For Systemic Risk

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.