Dumping Media assets doesn’t eliminate problems

The wireless giants finally decided to focus back on the wireless market as 5G becomes the focal point, but this doesn’t mean Verizon Communications is a buy. The company is unloading the Verizon Media business as the wireless business is struggling. My investment thesis remains Neutral on the stock.

Unloading Verizon Media
Under the terms of the agreement, Verizon will receive $4.25 billion in cash, preferred interests of $750 million and retain a 10% stake in Verizon Media in the deal with Apollo Global Management. The company spent far more money acquiring the assets of Yahoo and AOL and years attempting to develop the media unit. In total, TechCrunch estimates the company spent $9 billion on just the AOL and Yahoo! assets alone suggesting this deal values those business units at nearly 50% of the original value.

The news beat AT&T to the punch as the wireless and media giant agreed to a deal with Discovery to combine their media assets. The move unloads WarnerMedia to shareholders and pushes the remaining AT&T back to focusing on the wireless market.

In total, Verizon unloaded a media business that generated $7.0 billion in revenues during 2020. The business unit saw revenues drop 5.6% last year due to COVID-19 lockdowns.

Verizon Media had seen sales bounce back by over 10% in the last two quarters, led by a big boost in advertising revenues, while the numbers weren’t highly impacted by COVID-19 until last Q2. Regardless, the company still dumped valuable media revenues for less than 1x sales just to obtain $5 billion in cash and assets in order to unload the business.

Verizon has $148 billion in net debt so this deal for only $4.25 billion in cash barely impacts the net debt position. The company will have to maintain adjusted EBITDA levels to keep the leverage ratio at close to 3x.

Struggling wireless biz
Verizon is back to focusing on the wireless segment where the company isn’t exactly chugging along. In Q1, the company had a weak wireless subscriber number with a 178K decline in post-paid phone net adds.

As a whole, the sector saw nearly 2 million in post-paid phone net adds led by T-Mobile at 773K, AT&T at 536K, Charter at 300K and Comcast at 277K. Verizon might need to dump the media business just to refocus on the struggling wireless business, buy this move doesn’t make the stock appealing.

Now, Verizon impressed with sequential wireless service revenue growth, but the lack of subscriber growth is a negative indicator for future growth. Remember, the wireless giant only guided to 3% wireless service revenue growth after a year in 2020 where revenues were held down by COVID-19.

The company spent ~$53 billion in the recent 5G C-Band spectrum auction again in a sign the wireless business is struggling at Verizon. A report from Allconnect grades T-Mobile as having the best wireless network now based on a combination of wireless industry reports from Ookla, RootMetrics, OpenSignal and Consumer Reports.

The overall Verizon score is similar to T-Mobile at 7.85, but the wireless giant is really starting to lag in speed scores while leading in coverage and Consumer Reports suggesting maybe reputation is propping up the business more than network performance. As Allconnect mentions in the article, Verizon had dominated industry network reports going back to 2013 and the addition of the Sprint network has allowed T-Mobile to leapfrog into a slight lead now.

The stock initially jumped after the media deal was announced, but the market is quickly realizing the limited cash from the sell doesn’t help much with the balance sheet. In addition, the Verizon wireless business has faltered in the last few years leaving the stock to now focus on a less attractive asset.

After the deal closes, Verizon will report quarterly GAAP revenues which will decline due to stripping out the Verizon Media business generating up to $2 billion in quarterly revenue. The stock will face a major headwind until mid-2022 as investors expect 5G growth won’t get those via the quarterly reports. Seeking Alpha