The Long and Short
Verizon tender offer chips away at its debt load
Meredith Contente | November 5, 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.
VZ (Baa1/BBB+/A-) announced a waterfall tender last week for up to $4 billion of bonds, as the company looks to address its total debt balance which stood at $151 billion at the end of the third quarter of 2021. Investors should take advantage of the tender offer, particularly for those notes that have a tender premium of 9% or above as VZ spreads are unlikely to tighten much more from tender levels. Holders who participate must do so by the early tender deadline, 5pm NYC time on 11/8/21, or they lose the $50 (per $1,000 notional) early tender premium. Without that premium tender levels are not attractive, and essentially wider than where the bonds were trading prior to the announcement.
The tender is across fifteen series of notes with a total amount outstanding of $20.2 billion (Exhibit 1).
Exhibit 1. VZ Waterfall Tender
While the company maintains a net unsecured leverage target in the 1.75x-2.0x range, achieving that goal will not happen until 2025 at the earliest, as the company looks to reinvest in the business while growing the dividend, which has been increased for 15 consecutive years. Net unsecured leverage currently stands at 2.7x, which is up from 2.1x in the year ago period, largely due to spectrum auctions. When adjusted for leases, leverage is closer to 3.4x. VZ trades tight to its peer group (see Exhibit 2), including AT&T Inc. (T – Baa2/BBB/BBB+), but AT&T is expected to bring net leverage to below VZ’s next year post the separation of WarnerMedia and the closing of the DirecTV sale. VZ’s leverage is likely to rise further as the company is looking to close on the TracFone Wireless acquisition (for $6.5 billion), which is expected to close in 4Q21.
Exhibit 2. BBB Telecom Curve 10yr-30yr
Spectrum Buying Increases Debt Load
VZ was the largest bidder in the C-Band auctions earlier this year, having spent $53 billion for additional spectrum. Management justified the hefty price tag by noting it was imperative for its 5G expansion. VZ launched its nationwide 5G dynamic spectrum sharing (DSS) network in October 2020 with coverage in over 1,800 cities, covering more than 200 million of the US population. VZ ended 2020 with 60+ 5G Ultra Wideband (UW) Mobility cities and 10+ 5G UW Home cities. The 5G UW service provides for download speeds that are 2x faster than 4G and can handle data volumes 100x larger than previous capabilities. 5G adoption is currently tracking ahead of 4G adoption and is growing at a rapid pace. VZ has noted that since the 5G DSS launch, roughly 25% of devices were on 5G, versus 10% of devices on 4G within 12 months of launch. This is important as VZ will see a significant improvement in capital efficiency from a cost/MHz perspective as more people adopt 5G enabled phones. That said, 5G will add to both growth opportunities and improve cash flow generation.
As the top bidder in the C-Band Spectrum auctions, VZ noted that they more than doubled their existing mid-band spectrum holdings. VZ was successful in securing 140-200 MHz of C-Band spectrum in every available market. As such, VZ has enough incremental 5G bandwidth for 100 million people in the initial 46 markets, with coverage expecting to increase to more than 250 million people by 2024. Not only is the C-Band spectrum important to VZ’s 5G expansion, but management noted that it also provides for more roaming opportunities and improved economies of scale as C-Band is a widely used spectrum across the world. VZ will be launching 5G service on C-Band spectrum in the coming months.
Full Year Revenue and EPS Guidance Revised Upward
VZ updated its full year guidance and now expects total wireless service revenue growth of 4.0%, up from a previous range of 3.5%-4.0%. EPS was revised higher as well and management now expects it to be in the $5.35-$5.40 range, up from $5.25-$5.35. Capital expenditures were kept at the previous range of $17.5 billion-$18.5 billion, with $2 billion-$3 billion expected for its C-Band build. However, management did note that capital expenditures are subject to further supply chain disruptions. VZ is working hard with both vendors and suppliers to ensure they have adequate equipment to meet their C-Band build needs as well as devices that customers want. However, further supply chain disruptions could force the company to pay up to insure they have all required equipment for the 5G C-Band launch, which remains management’s top priority for the last quarter of the fiscal year.