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Telecom Stock Roundup: FCC Plans to Scrap Net Neutrality, DOJ Sues AT&T-Time Warner Merger Deal

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There were a couple of notable developments in the telecom space last week. Recently, Ajit Pai, the Commissioner of Federal Communications Commission (FCC), revealed a draft plan for a complete roll back of Net Neutrality. The FCC is set to vote on the proposed changes at its next monthly meeting on Dec 14.

Notably, in May 2017, the FCC voted 2-1 to start the formal process of unwinding the Net Neutrality rules. There is little doubt that if the FCC repeals Net Neutrality laws, the ISP (Internet Service Provider) industry will be a major beneficiary.

The U.S. Department of Justice (DOJ) filed a lawsuit against AT&T Inc. T over its proposed $85.4 billion takeover of media giant Time Warner Inc. TWX). The agency has stated that the proposed deal will increase prices for rival pay-TV operators as well as subscribers. It will also act as a stumbling block for the development of online video. The telecom and pay-TV behemoth has decided to challenge the DOJ lawsuit in the court within the stipulated 60 day time period.

Beside the above-mentioned developments, Verizon Communications Inc. VZ too remained in news last week. Verizon and AT&T inked a joint deal with Tillman Infrastructure to build cell towers in the United States. Privately held, Tillman is the owner and operator of towers, small cells and smart cities infrastructures. Per the deal, Tillman will construct customized towers and lease it to Verizon and AT&T. Construction work of the towers will begin in the first quarter of 2018. Installation of equipment in the already completed sites will begin at the earliest.

Per recent news, Verizon and Comcast Corp. CMCSA are planning to acquire some assets of Twenty-First Century Fox Inc. FOXA. These assets include movie and TV production studios, cable networks FX and National Geographic as well as international assets such as the Star network in India and the European pay-TV provider Sky Plc. These units have also been mentioned in recent talks between Twenty-First Century Fox and The Walt Disney Co. (DIS - Free Report) .

Per a recent Bloomberg report, Verizon is close to a new deal with the National Football League (NFL) for digital streaming rights. This deal will allow Verizon’s subscribers to easily access games on all devices — Internet-connected TVs, tablets and phones. The deal is a follow up of Verizon’s previous contract with NFL, which allowed streaming in devices with screens of 7 inches or less. Verizon currently carries A Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover,  Verizon has come up with a range of wireline and wireless offers for Thanksgiving shoppers. The company is trying to attract fiber-to-the-home (FTTH) customers through a five-day promotion, starting from Thanksgiving Day on Nov 23 til Nov 27. Verizon is also offering attractive discounts on smartphone purchases. Under Verizon Unlimited, the telco is offering a $378 discount, which will be credited to the customer's account. The selected latest models under the offer include Google Pixel 2, Google Pixel 2 XL, Samsung Galaxy Note 8, Galaxy S8, Galaxy S8+ and Moto Z2 Force.

Outside the United States, The EC (European Commission), the regulatory authority of the European Union, recently announced that its decision on the proposed merger between Qualcomm Inc. QCOM and NXP Semiconductors NV NXPI may come in 2018. Earlier, the EC had twice halted its review of the deal -- once in June and again in August. Initially, Qualcomm had anticipated that the buyout deal would be closed by the end of 2017. Notably, the proposed merger has already been approved by the U.S. antitrust authorities.

Read the last Telecom Stock Roundup for Nov 16, 2017.

Recap of the Week’s Most Important Stories  

1.    In a historic decision, the FCC had approved Net Neutrality rules, on Feb 26, 2015, after a majority vote. The five-member regulatory body voted in favor of Net Neutrality with a 3-2 margin. However, the voting pattern was clearly divided along party lines, as three Democrat representatives voted in favor of Net Neutrality, while the Republican representatives opposed it.

Ajit Pai, a staunch Net Neutrality opponent, has always maintained his view that consumers would be worse under Net Neutrality and should expect their bills to go up along with slow broadband speed.   (Read more: FCC Plans to Abandon Net Neutrality -- Major Boon for ISPs)

2.    The DOJ in its lawsuit complained that the AT&T-Time Warner merger will be harmful to American consumers. The merged entity will enjoy control over both high-quality content and distribution medium, which is likely give room to AT&T to raise prices without investing much in offering innovative products. The DOJ has asked AT&T to either divest it DIRECTV division or Turner Broadcasting assets including CNN. However, the company denied the arguments.   (Read more: AT&T Faces DoJ Lawsuit for Time Warner Bid: What Next?)

3.    Per recent news, Comcast was in talks with Twenty-First Century Fox to acquire the mass media company’s assets. Verizon also approached Twenty-First Century Fox about potential acquisitions. Walt Disney is also interested about these assets. However, according to domestic regulations, no company can own two broadcast networks at the same time. While Disney owns American Broadcasting Company television network, Comcast owns NBC Universal.   (Read more: Are Comcast and Verizon Eyeing 21st Century Fox's Assets?)

4.    The partnership between Verizon and AT&T implies that the biggest U.S. wireless carriers are willing to strike deals with other vendors to secure prices for towers. Moreover, carriers are always looking for alternative partners to reduce their dependence on specific customer base, thanks to the already saturated domestic wireless market. Domestic telcos are moving away from traditional tower leasing model, in order to cut down spending as data consumption continues to rise.  (Read more: Verizon-AT&T Team Up with Tillman to Construct Cell Towers)
5.    On Oct 27, 2016, Qualcomm entered into a definitive agreement with the Netherlands-based mobile chipset giant for the latter’s acquisition. Per the deal, Qualcomm would be paying $110 per NXP Semiconductors share in cash, reflecting an enterprise value of approximately $47 billion (equity value of $39 billion) for NXP. In June 2017, the EC launched a thorough investigation into the proposed acquisition. The EC will conduct an in-depth probe to assess if the deal leads to higher prices, exclusion of rival chipset suppliers and reduced innovation in the semiconductor industry. The merged entity is likely to command a strong market position with an extensive portfolio of baseband chipsets and chips for near-field communications. (Read more: Qualcomm-NXP Semiconductors Merger May Get EC Nod in 2018)

Price Performance

The following table shows the price movement of the major telecom stocks in both the last week and last six months.

In the last five trading sessions, share price movement of the major telecom stocks witnessed a mixed trend. Barring Sprint, all three U.S. national telecom carriers, Verizon, T-Mobile US and AT&T gained value in the last week. However, leading pay-TV operators like Comcast, Charter Communications and DISH Network lost value in the same time frame. 

Meanwhile, price performances of most of the major telecom stocks were negative in the last six months. Sprint, DISH Network and Telefonica lost significantly in the same time period while America Movil gained the most.  

What’s Next in the Telecom Space?

We do not foresee any significant changes in the telecom industry or overall global economic factors that can affect the industry in the coming week. Consequently, we expect stocks to trade in line with the broader market movement.

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