Why Is Verizon So Eager for a Merger?

4/28/17

By Chris Neiger, MotleyFool

Verizon (NYSE:VZ) wants to find a merger partner, and it's not being shy about making it known to Comcast (NASDAQ:CMCSA), Disney, or any other big player that might be willing to entertain the idea. Verizon CEO Lowell McAdam specifically mentioned he'd be open to talking with Comcast's CEO Brian Roberts, telling Bloomberg last week:

If Brian came knocking on the door, I'd have a discussion with him about it. But I'd also tell you there isn't much that I wouldn't have a discussion around if somebody came and said "here's a compelling reason why we ought to put the businesses together."

A hand holding a smartphone at night

IMAGE SOURCE: GETTY IMAGES.

Why is the nation's largest wireless telecom company dropping not-so-subtle hints that it's interested in a merger? The answer came, at least in part, when Verizon reported its first-quarter 2017 earnings later in the week. Verizon lost 307,000 subscribers in the first quarter of this year, down from a net gain of 640,000 this time last year.

Those losses in net subscribers are a symptom of a larger problem within Verizon: The company needs much more than its wireless services to survive.

Weary of wireless

The company earns 75% of its top line from its wireless business, which is taking a beating from the self-proclaimed un-carrier, T-Mobile US (NASDAQ:TMUS). Verizon's been losing this battle as T-Mobile has released a torrent of deals over the past few years, along with boosting its LTE coverage, speed, and dependability. All of this is starting to take its toll on Verizon.

The carrier's chief financial officer, Matt Ellis, responded to all the news reports of McAdam's comments by saying on the earnings call that:

We're confident in executing our strategy organically. If there's the right opportunity out there to accelerate the strategy inorganically in a way that adds shareholder value, we're always looking at those opportunities.

Basically, Ellis is saying that Verizon doesn't need a merger to succeed, but if someone's offering, then it's certainly open to talks. One could argue that it wouldn't be wise for a CFO to say anything less than "we got this" on an earnings call.

The fact is that wireless networks in the U.S. have quickly become the boring roads that lead their subscribers to more interesting destinations on the internet. Verizon, T-Mobile, and AT&T (NYSE:T) all get you to the same place, with a relatively smooth ride, and it's getting harder and harder to stand apart from the crowd.

To get there, Verizon has stepped further into the content space, which is why the company purchased AOL and is buying Yahoo!, and why it invested in its go90 video platform. But those moves pale in comparison to rival AT&T's $85 billion deal to merge with Time Warner(NYSE:TWX). The deal is still pending approval, but once it closes it will give AT&T access to Time Warner's treasure trove of content, including HBO, TNT, CNN, and Warner Bros.

Verizon could soon be left on the content sidelines, with its stalling wireless business, and no major long-term growth prospects in sight.

Let's make a deal

McAdam admitted to Bloomberg that he knows there's "never a dream deal" that will bring the company everything it wants. But a major merger could bring his company something that it desperately needs: a big step toward content.

Verizon spent years building out an extensive wireless network so its subscribers could access anything they wanted online. And it achieved that goal arguably better and faster than any of its wireless competitors. But now it's time for the company to transition away from building roads for the internet, and start creating destinations of its own. If it can't do that alone, then a merger is the most logical choice.

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