Verizon's Tracfone Buy Expected to Get US OK

Verizon’s proposed buy of Tracfone from America Movil for as much as close to $7 billion (see 2009140010) appears to show Verizon growing its prepaid wireless market in a big way. The early read is it should have few problems getting clearance from regulators. Tracfone is the largest U.S. reseller of wireless services, with 21 million subscribers.

This "aligns with Verizon’s growth oriented Network as a Service strategy, and will provide more U.S. consumers seeking value wireless plans with improved experiences and enhanced services, including fixed wireless residential broadband solutions, 5G access and expanded international calling and roaming options,” Verizon said Monday. It noted more than 13 million Tracfone subscribers are on Verizon’s network through a wholesale agreement. Verizon pledged to continue offering Lifeline through Tracfone.

“The Tracfone deal marks a commitment to a pre-paid segment that has long seemed to be a secondary priority for Verizon,” said MoffettNathanson’s Craig Moffett: “Perhaps it is simply a recognition that pre-paid tends to take share from post-paid during times of economic hardship. Or perhaps it is a recognition that the users of Tracfone’s pre-paid service are, in many ways, a perfect fit for Verizon’s network, with their heaviest usage in areas neatly complementary to where Verizon’s current users are most concentrated.”

The buy is part of Verizon’s long-term plan, Recon Analytics’ Roger Entner said. The company said five years ago its prepaid strategy was Tracfone, he noted. “It provides Verizon a better prepaid entry as unemployment is very high.” The deal could potentially shift the balance of power between operators and mobile virtual network operators, Entner said. As the largest prepaid provider, Tracfone “had more pricing power” in negotiations with carriers that has meant overall prices they charged MVNO has been lower, he said.

“What the FCC and DOJ should consider is the impact of Tracfone leaving the market on the MVNO wholesale market,” Entner said: “The Republican DOJ and FCC did not take the wholesale MVNO market into account when approving T-Mobile/Sprint. Maybe things will be different after the election regardless of who wins.”

“Verizon might need to make some commitments to protect Tracfone subscribers, but regulators haven’t viewed resellers as being true competitors with facilities-based carriers,” said Cowen’s Paul Gallant. “This deal should be fine.”

S&P Global Ratings maintained its BBB+ rating on Verizon but noted questions remain about expenditures the carrier will make in the upcoming C-band auction. “Verizon has little experience operating in the prepaid market, which has higher churn and lower average revenue per user (ARPU) characteristics than the postpaid segment,” the debt ratings firm said: “The acquisition offers some cost-saving opportunities as Verizon migrates existing Tracfone customers that roam on other U.S. mobile networks to its own network. The company also has a good opportunity to recapture customers that migrate to lower priced prepaid plans from postpaid in the event of a prolonged economic downturn.”

“The transaction marks a shift in strategy for Verizon -- they have eschewed interest in the prepaid market before now,” said New Street’s Jonathan Chaplin. “That value will shift from postpaid to prepaid in a recession,” he said: The deal is likely to be approved by either a Republican or Democratic administration.

LightShed’s Walter Piecyk said the long overdue” deal should be approved. “There are no FCC spectrum licenses changing hands,” he wrote investors: “Putting the Verizon brand behind the multiple TracFone pre-paid brands will likely increase their competitiveness.” Verizon’s prepaid market share would rise to about 34% compared with 28% for T-Mobile and 25% for AT&T, he said.