September 14, 2020
Verizon said it plans to acquire TracFone, the US MVNO of Mexico's America Movil that counts around 21 million customers, in a deal worth almost $7 billion.
The move would make Verizon – already the biggest mobile provider in the US with around 120 million connections – significantly bigger. The analysts at Wall Street research firm New Street Research wrote that a Verizon/TracFone merger would make Verizon the largest player in prepaid with 33% of the market. T-Mobile would be second at 28%, followed by AT&T at 23% and Dish at 12%.
The deal, which Verizon hopes to close in the second half of 2021, also gives Verizon a much bigger play in the US prepaid market just as a recession could make the sector much more valuable. As noted by Walter Piecyk, a Wall Street analyst at LightShed partners, Verizon currently has only 4 million prepaid customers, down from its peak of 6 million in 2014.
Verizon's TracFone transaction comes just a few months after Dish Network purchased 9.2 million prepaid customers from T-Mobile for $1.4 billion, as well as the close of T-Mobile's blockbuster merger with Sprint.
5G and fixed wireless
Verizon hinted that it will work to expand the TracFone business, which currently spans brands ranging from Straight Talk to Simple Mobile alongside 850 employees and 90,000 retail locations in stores like Walmart and Best Buy.
"The acquisition of Tracfone aligns with Verizon's growth-oriented network-as-a-service strategy, and will provide more US 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 in a release. "The portfolio of Tracfone brands creates a platform for growth and innovation in Verizon's support of the value and low income segments. Verizon will continue to offer Lifeline service through Tracfone and further develop its core brands, products and distribution channels, including StraightTalk, the vast majority of whose customers operate on the Verizon network today."
Verizon is poised to expand its 5G Home fixed wireless Internet service to more markets, and has been loudly touting its 5G network.
Although Verizon launched its Visible all-digital prepaid brand in 2018, the company does not have significant prepaid operations like AT&T (Cricket Wireless) and T-Mobile (Metro by T-Mobile).
A shifting prepaid strategy
Verizon's relationship with TracFone has tightened over the past several years, likely due to AT&T's decision to sell its stake in America Movil and withdraw from its board in 2014 ahead of its entry into the pay-TV and mobile industry in Mexico in a direct challenge to America Movil. Indeed, Verizon's former CFO described TracFone as "our prepaid product" in 2016.
Importantly, Verizon said that roughly 13 million of TracFone's subscribers are currently on its network. The remainder of TracFone's 8 million customers are likely using the network of AT&T or T-Mobile. It's probable that Verizon will work to migrate those customers to its own network.
Interestingly, some analysts wondered at Verizon's ability to support those additional customers, given the operator has less spectrum than its US rivals. The analysts at New Street wrote that they believe Verizon's purchase of CBRS spectrum, and its expected purchase of C-band spectrum, will give it the ability to support more customers.
Other analysts agreed. "We see this as a vote of confidence by Verizon in their network, as, if they were feeling capacity-constrained, they wouldn’t be looking to add more prepaid customers," wrote the Wall Street analysts at Evercore. "We note, however, that prepaid customers rank the lowest when it comes to network priority – in the event of congestion, Verizon's valuable postpaid customers come first when it comes to getting network access."
TracFone, for its part, has reported significant gains in its US prepaid business amid the pandemic. "May was especially strong as a result of US Government Stimulus and additional unemployment benefits reaching a broad proportion of the population and people sought attractive communication solutions," America Movil said in its most recent earnings report.
America Movil also said that TracFone inked a new MVNO agreement that boosted its profits, but the company did not provide details on that deal.
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