Verizon to Acquire America Movil’s Tracfone For Up To $6.9 Billion; Target Price $70

Verizon Communications, an American multinational telecommunications conglomerate, said it will acquire Mexican telecom giant America Movil’s Tracfone, the leading pre-paid and value mobile provider in the United States, for up to $6.9 billion in cash and stock, sending its shares as high as 1.6% on Monday.

The consideration for the transaction will include $3.125 billion in cash and $3.125 billion in Verizon common stock, subject to customary adjustments, at closing. The agreement also includes up to an additional $650 million in future cash consideration related to the achievement of certain performance measures and other commercial arrangements, the company said.

Verizon expects to drive significant benefits and network synergies from the transaction. Verizon expects the transaction to be accretive in the first full year following closing, excluding transaction and integration costs, and does not expect the transaction to materially impact capital expenditures.

“We estimate Verizon’s (VZ) post synergy multiple will be just 3-4x, and that conservatively assuming no growth, will be 3% accretive to FCF/share in year two post-close, and we continue to believe VZ will be in a position to start buying back stock in 2022,” said Colby Synesael, equity analyst at Cowen.

“We view the deal as positive given (1) significant synergies that we estimate will increase TracFone EBITDA margins to 30% two years from close, and (2) increased exposure to value/prepaid subs in a recessionary environment as well as a potential upsell opportunity. Including a 10% capex assumption on TracFone service revenue, we estimate the deal will be 3% accretive to FCF/share and 3-4% accretive to EPS in year two,” Synesael added.

The transaction is subject to receipt of regulatory approvals and other customary closing conditions. Verizon expects the transaction to close in the second half of 2021.

Credit Suisse acted as financial advisor to Verizon and Debevoise & Plimpton acted as legal advisor.

Verizon’s shares closed 0.88% higher to $60.32 on Monday after rising as high as 1.6% intraday; however, the stock is down about 2% so far this year. Also, the America Movil ended 6.36% higher at MXN 14.22 in Mexico.

Executive comments

“This transaction is aligned with what we do best: providing reliable wireless service alongside a best-in-class customer experience,” said Hans Vestberg, Chairman and CEO of Verizon.

“This transaction firmly establishes Verizon, through the Tracfone brands, as the provider of choice in the value segment, which complements our clear leadership in the premium segment,” Vestberg added.

Verizon stock forecast

Twelve analysts forecast the average price in 12 months at $62.70 with a high forecast of $70.00 and a low forecast of $57.00. The average price target represents a 3.95% increase from the last price of $60.32. From those 12 equity analysts, six rated “Buy”, six rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $60 with a high of $71 under a bull-case scenario and $42 under the worst-case scenario. Verizon Communications had its stock price forecast boosted by Deutsche Bank to $62 from $60.

Other equity analysts also recently updated their stock outlook. Verizon Communications had its price objective boosted by analysts at UBS Group to $60 from $59. The brokerage presently has a “neutral” rating on the cell phone carrier’s stock. Citigroup boosted their price objective to $60 from $55 and gave the stock a “neutral” rating. At last, JPMorgan Chase & Co. dropped their price objective to $62 from $63 and set a “neutral” rating.

We think it is good to buy at the current level and target $70 as 100-day Moving Average and 100-200-day MACD Oscillator signal a strong buying opportunity.

Analyst views

“We will be interested to learn why Verizon decided to jump into prepaid in a more aggressive way after generally preferring to go the wholesale route in recent years, while the prepaid segment overall has lost momentum relative to postpaid in recent years. With an election looming we will also be watching for any regulatory commentary given Verizon’s wireless/postpaid market leadership, although Tracfone is not a facilities-based player,” said Simon Flannery, equity analyst at Morgan Stanley.

“Attractive business mix, as a wireless market leader. Wireless service revenue 70% of consolidated revenue, and wireless EBITDA 85% of consolidated EBITDA. Dividend yield and potential buybacks provide some support, while the transition to 5G creates opportunities and risks, with mid-band spectrum needs in focus,” Flannery added.

Upside and Downside risks

Upside: 1) Continued strength in wireless. 2) Rates remain lower for longer. 3) Defensive market. 4) Developments around mobile video, and internet of things, highlighted by Morgan Stanley.

Downside: 1) Rising interest rates make the dividend yield less attractive. 2) Competitive price pressure from wireless competitors. 3) Wireline business faces significant secular pressures. 4) Spectrum spend/M&A pressure Balance Sheet metrics.

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