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T-Mobile leverage to fall below investment grade peers
admin | April 23, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
T-Mobile US Inc (TMUS) has the ability to outperform investment grade peers as the company is targeting net leverage of mid-2.0x by year-end 2022. The C-Band spectrum auction saw both Verizon Communications (VZ) and AT&T Corp. (T) aggressively spend, pushing out leverage reduction by a couple of years, while estimates are that TMUS’ net leverage will be below that of VZ and T by the end of 2022. TMUS management anticipates unsecured ratings will be upgraded to investment grade sometime in 2023. Over that time, TMUS spreads could outperform peers as it remains in debt reduction mode. Synergy capture from the Sprint merger recently increased, pushing EBITDA higher at a faster rate and lowering leverage. Investors looking for both yield and duration should consider TMUS 3.6% 2061 bonds, which could collapse closer to VZ.
Exhibit 1. 30yr+ Wireless BBB Curve
Source: Bloomberg TRACE; Amherst Pierpont Securities
Leverage Reduction Should Prompt Upgrade
With a mid-2.0x net leverage target expected to be achieved by next year, TMUS is putting itself in a position for unsecured ratings to be upgraded to Investment Grade after achieving its leverage target. At that time, TMUS’ net leverage is likely to be lower than that of both VZ and T. Both VZ and T pushed their leverage targets down the road as they spent $45 billion and $23 billion, respectively, in the most recent C-Band spectrum auction to fuel their 5G network capacity and catch up with TMUS’ 5G coverage. While TMUS’ net leverage is expected to hit 3.2x this year, the company is looking for leverage to decline by approximately seven ticks by year end 2022. Net leverage at both VZ and T is expected to hover closer to 3.0x area in 2022 before seeing some decline into the high 2.0x range by 2023.
5G Coverage Superior to Peers
TMUS is arguably the leader in the 5G race which enabled them to spend more conservatively in the spectrum auction relative to peers. We note that TMUS spent just over $9.0 billion in selective markets. Currently, TMUS’ 5G network covers 1.6mm square miles and a total of 287mm POPs. Additionally, TMUS’ Ultra capacity 5G network covers 125mm POPs. This compares very favorably to both VZ and T whose 5G networks cover 233mm and 231mm POPs, respectively. Not only is TMUS’ coverage much better, but it maintains the fastest download speeds on its network. As the pandemic winds down with the vaccine rollout, the ability to work remotely will likely become a permanent change. Download speeds will continue to play a factor as customers choose a wireless carrier. According to a 3rd party study, TMUS outpaced both its peers with a download speed of 81Mbps through February 2021. VZ was the lowest on the totem pole with a download speed of 66Mbps while T was at 77Mbps.
Exhibit 2. TMUS 5G Coverage
Source: TMUS Analyst Day Presentation
Outpacing Synergy Targets
TMUS not only outpaced their synergy targets for 2020 but also increased its synergy target for 2021. Management’s original merger plan called for $300 million of synergies in 2020, however TMUS was able to deliver a synergy rate 4x higher than its original expectations. The largest savings came from SG&A which produced $600 million of savings in 2020. For 2021, TMUS’ synergy plan is now calling for synergies in the $2.7 billion-$3.0 billion range, which is up from original guidance of $2.5 billion. While the company includes avoided costs as part of their synergy guidance, we note that cost of sales and SG&A is expected to produce synergies in the range of $1.7 billion-$2.0 billion in 2021. Given the outperformance on the synergy front, management now expects total run-rate synergies of $7.5 billion by 2024. This is up 25% from its original run-rate synergy target of $6 billion. Additionally, management noted that they now expect to exceed the original $6 billion sometime in 2023. The faster pace and increased run rate translates to a new net present value of over $60 billion for shareholders, more than 40% higher than the original expectation of $43 billion.
Exhibit 3. Update Synergy Outlook
Source: TMUS Analyst Day Presentation
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