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Trump regulatory regime expected to look kindly on consolidation in telecoms sector

2017 is shaping up to be a landmark year in the US telecoms sector, with industry executives and analysts predicting a frenzied period of mergers under the more deal-friendly regulatory regime of President Donald Trump.

The sector is readying itself for a period of upheaval. “Now is the time to consider that which in an earlier time might have been unthinkable”, says Jonathan Chaplin, analyst at New Street Research. A “Big Bang consolidation” this year is inevitable, he says.

Mr Trump has boosted confidence that his administration will be more open to megadeals since assuming the presidency. He picked Ajit Pai — a Republican commissioner on the Federal Communications Commission sympathetic to arguments that telecoms groups need to merge to compete with Silicon Valley rivals — to chair the US telecoms watchdog. And Jeff Eisenach, a consultant who has supported previously blocked telecoms mergers, is head of the FCC transition team.

The prospect of lighter regulation has lifted shares across telecoms companies since election night. Sprint and T-Mobile USA, which are viewed as the first companies likely to tango under the Trump regime, have emerged as the biggest winners: Sprint’s stock has gained 49 per cent, while T-Mobile has jumped 43 per cent since the vote.

Telecoms groups are temporarily banned from discussing deals because they are in the midst of a government-run auction of airwaves. However, the auction is expected to close in the next few months, which will kick off a “wild and woolly” period of rumours and dealmaking “like none we have ever seen”, said Craig Moffett, analyst at Moffett Nathanson.

“Over the next few months, we suspect that every conceivable combination will get its 15 minutes of fame,” added Mr Moffett.

Barack Obama’s administration had taken an interventionist approach to antitrust regulation, blocking an unprecedented number of big-ticket deals, including Comcast’s $42.5bn proposed takeover of Time Warner Cable in 2014 and AT&T’s $39bn bid for T-Mobile USA in 2011. It also signalled it would block any attempt by Sprint and T-Mobile to merge.

As a result the US telecoms sector looks much as it did five years ago, dominated by the “big two” wireless carriers: Verizon and AT&T, and the smaller challengers, Sprint and T-Mobile.

But telecoms and cable companies are looking now to fend off digital disruption from technology groups such as Netflix, while insulating themselves from the price wars launched by smaller players like T-Mobile, which has offered aggressive promotions to steal customers from larger rivals.

Observers are mulling a chessboard of potential combinations. Flirtations between Sprint and T-Mobile date back to 2013 when Masayoshi Son, chief executive of Japan’s SoftBank, took control of Sprint and sought to merge the two companies.

However, the FCC signalled at the time it would not approve any merger that cut the number of carriers from four to three.

Fast forward four years and Mr Son was among the first executives to visit the president-elect, after which Mr Trump told reporters the Japanese executive was “one of the great men of industry”.

“It is clear that [Masayoshi Son] wants to do a deal,” one telecoms banker said.

Analysts estimate the merger could generate significant savings, thanks to a larger network and stockpile of spectrum. The combined group would boast 97m mobile phone subscribers, making it a big enough company to compete with Verizon’s 114m and AT&T’s 91m subscribers.

However, Mr Son should probably not pop the champagne bottles yet. Getting the deal approved is “not a layup”, said Barclays analysts. Many of the staff at the FCC and the Department of Justice, which have supported a four-player market, are likely to remain, meaning the “threshold for approval is unlikely to completely reverse”, they said. Financing could also pose a challenge, as Sprint and T-Mobile USA combined hold some $70bn in debt.

Other suitors might also emerge. The two big US cable companies — Comcast and Charter — have flagged their ambitions to enter the wireless market this year. Buying T-Mobile, viewed as a prized asset due to its red-hot customer growth, would make for a quick entry.

Charter has already hired bankers to explore a deal with Verizon, which would create the world’s largest telecoms and cable group, the FT reported last week. While talks are in early stages, the interest underscores the likelihood of cable operators teaming up with wireless carriers — a tie-up that regulators are expected to look upon more favourably.

Flirtations between Verizon and Charter come as US regulators begin evaluating rival AT&T’s proposed $85.4bn purchase of content powerhouse Time Warner. While still preliminary, the chess game suggests that the “big two” are putting their faith in diverging strategies for the American wireless space. “So which will it be? Verizon’s bet on infrastructure, or AT&T’s on content?” asked Mr Moffett.

The AT&T-Time Warner megadeal could set a precedent for further transactions, although its chances of approval were dealt a blow by Mr Trump, who on the campaign trail vowed to block the combination. However, last week, Randall Stephenson, AT&T’s chief executive, said he was “very confident” it would get done.

While the group has given itself two years to decide on the exact strategy, Maersk Energy is clearly focusing on its two major developments that are planned to start production in 2019 -- Culzean in the UK North Sea and the Statoil-operated Johan Sverdrup in the Norwegian North Sea.

"We have said that we will focus on fewer geographies and certainly in the North Sea. Norway and the U.K. will be an area of focus for Maersk Oil," Maersk Energy CEO Claus Hemmingsen told Reuters, speaking on the sidelines of the GE Oil and Gas annual meeting in Florence.

Maersk's assets in Brazil's offshore Campos basin -- a 20 percent stake in the Wahoo field and a 27 percent stake in Itaipu assets -- appear "on the fringe" of the company's portfolio, Hemmingsen said.

"It is not being marketed but we are looking through the portfolio."

The current value of the assets was unclear. The Danish company acquired three Brazilian blocks from SK Energy for $2.4 billion in July 2011 but in 2014 sold its stake in one and wrote down the value of the business by $1.7 billion.

Maersk is in the midst of a major restructuring to shift the company's focus to its transport and logistics businesses and separate its energy business in the face of a drop in income.

Maersk Energy also plans to break up its oil and gas exploration and production business, known as Maersk Oil, and its three other services businesses -- drilling, supply services and tankers, he said.

"We have three service companies of which many are top quartile if not leaders in their sector. We have three service companies that are all global. We have no intention to limit their presence in their global markets."

"However there is little to speak of in terms of synergies so we actually believe three stand-alone companies will be the best outcome. That could be achieved by mergers or de-merging them, that has yet to be decided. "

EU competition commissioner is in Dublin to appear before committee of MPs

The EU’s competition commissioner said Dublin was working to collect €13bn in unpaid taxes from Apple despite the passing of the original deadline for making the payment.

Margrethe Vestager admitted that collecting the money was proving “complicated” because the sum was so large and because Ireland’s tax authorities were also seeking to work out their own calculations of how much the US technology company owed in unpaid taxes.

Ms Vestager was speaking in Dublin ahead of an appearance before a committee of Irish MPs investigating the shock European Commission ruling in August that Apple owed €13bn in unpaid taxes and that its tax arrangements in Ireland amounted to illegal state aid. Tim Cook, Apple chief executive, angered the MPs this month when he declined an invitation to address the committee.

Ms Vestager denied there was any attempt to single out US companies and said she was not concerned that the Apple ruling would affect US investment in Europe. But she insisted the Irish government had to collect the €13bn owed by Apple.

“The recovery [of the €13bn] has not been done yet, and the Irish authorities are moving forward to collect it,” she said. “It’s tricky to do because it is such a large sum. I appreciate that it is a complicated task.”

The Dublin government reacted furiously to the commission’s Apple findings, causing the biggest rupture between Ireland and the EU since the Irish financial crisis. The ruling has also infuriated Washington, which has accused the EU of unfairly targeting US companies in competition investigations.

Ireland and Apple, which employs nearly 6,000 people in the city of Cork, had been due to resolve the payment issue in early January by placing the money in an escrow account pending separate appeals by both parties against the commission’s finding. The appeals are expected to be lengthy, meaning the case is unlikely to be resolved for several years as it winds its way through the European courts.

Ms Vestager defended the commission’s declaration — which came after a three-year investigation — that two tax rulings offered to Apple by Ireland dating back to the early 1990s allowed the company to avoid tax on an unprecedented scale. She said the €13bn total was accurate “in round figures” and that the Dublin government knew the amount the commission found was owed by Apple would be large.

The adverse Apple ruling has highlighted Ireland’s 12.5 per cent headline rate of corporate tax, one of the lowest in Europe. The commission said the Apple case had nothing to do with the 12.5 per cent rate and was based solely on the special arrangements the company had with the Irish revenue commissioners.

However, John McGuinness, the committee’s chairman, said Apple “employs thousands of people in Ireland and this ruling could have far-reaching implications for multinationals in this country”.

Ms Vestager said the commission was investigating around 1,000 tax rulings offered by European governments to companies concerning the amount of tax they owed. There were no further “open” investigations into tax arrangements in Ireland or elsewhere. She said two separate investigations into McDonald’s and Amazon were “a high priority” for the commission but that their timing depended on “the contact and co-operation we get”.