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AT&T to Buy Straight Path Communications: ETFs in Focus

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AT&T (T - Free Report) will acquire Straight Path Communications for $1.25 billion in an all stock deal to accumulate the airwaves it needs for a next generation network.


This is the second acquisition by AT&T this year as it competes with other telecom giants to create a stronghold in the 5G space. In February this year, AT&T said it was acquiring privately held FiberTower and its millimeter wave spectrum rights (read: Telecom ETFs: What Lies Ahead in 2017?).


Straight Path Communications is one of the largest holders of 28 and 39 GHz millimeter wave spectrum, which has already been approved for use in 5G services by the U.S. Federal Communications Commission. Wireless carriers are willing to pay a premium to get into this space by acquiring companies that have the required licenses and expertise to help them get the right spectrum for the next generation network. The network is expected to boost Internet speeds significantly.


We note that earlier this year, Straight Path Communications was involved in a legal scuffle. It was asked to pay the FCC $15 million to settle a probe. The company was accused of submitting false progress data to renew airwave licenses. It was asked to transfer its 28 and 39 GHz licenses by January 2018 and pay 20% of sales proceeds.


Coming back to the deal, AT&T has agreed to acquire Straight Path for $95.63 a share in an all-stock deal designed to be a tax-free reorganization. This marks a 162% premium to its closing price of $36.48 on Friday, April 7, 2017. After the deal was announced, shares of Straight Path took a giant leap and closed at $91.64 on Tuesday, April 10, 2017. However, there was no noticeable impact of the announcement on AT&T shares.


The total value of the deal includes liabilities and the amount owed to the FCC. This deal can be a game changer for AT&T in the 5G space. Let’s discuss some ETFs, which have a high exposure to AT&T (see all Telecommunication ETFs here):


Fidelity MSCI Telecommunication Services ETF (FCOM - Free Report) :


This ETF is one of the cheapest funds in the telecom space. It is appropriate for investors who are bullish on the U.S. telecom sector.


It has AUM of $130.1 million and charges 8 basis points as fees per year. Verizon Communications Inc. (VZ - Free Report) , AT&T, and Level 3 Communications Inc. are the top three holdings of this fund with 22.31%, 22.22%, and 4.60% allocation, respectively. The fund returned 8% in the last one year and lost 0.31% in the year-to-date time frame (as of April 10, 2017). FCOM currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


Vanguard Telecommunication Services ETF (VOX - Free Report) :


This ETF is one of the most popular funds in the telecom space (read: Welcome Trump Era with These ETFs).


It has AUM of $1.50 billion and charges 12 basis points as fees per year. AT&T, Verizon  and T-Mobile US Inc. (TMUS - Free Report) are the top three holdings of this fund with 22.80%, 22.60%, and 4.50% allocation, respectively. The fund returned 5.19% in the last one year and lost 3.49% in the year-to-date time frame (as of April 10, 2017). VOX currently has a Zacks ETF Rank #3 with a Medium risk outlook.


iShares Global Telecom ETF (IXP - Free Report)


This ETF provides exposure to the global telecom space.


It has AUM of $301.8 million and charges 47 basis points as fees per year. Considering the top three holdings from a geographical perspective, the fund has 38.65% exposure to the U.S., 16.51% to Japan, and 8.13% to United Kingdom. From an individual holding perspective, Verizon, AT&T, and Vodafone Group PLC are the top three holdings with 20.15%, 16.03%, and 5.39% allocation, respectively. The fund lost 4.65% in the last one year and gained 0.89% in the year-to-date time frame (as of April 10, 2017). IXP currently has a Zacks ETF Rank #3 with a Medium risk outlook.


To Conclude


The 5G spectrum has become a lucrative avenue for all telecom giants. This new network, as and when available, will significantly impact revenues of telecom companies. Meanwhile, we believe it is best to remain on the sidelines.


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