UPDATE: Verizon Could See Upside In AT&T/T-Mobile Deal
(Updates with analyst comment on pricing stabilization and AT&T's potential distraction in fourth paragraph, and fresh stock quotes.)
By Melissa Korn
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Verizon Wireless is on the sidelines of the proposed merger of AT&T Inc. (T) and Deutsche Telekom AG's (DTEGY, DTE.XE) T-Mobile USA, but it could end up one of the deal's big winners.
While Verizon Wireless would become the U.S.'s second-largest mobile carrier after the deal, industry consolidation that marginalizes low-cost offerings could benefit the company by boosting its power to control pricing. Additionally, Verizon could win customers from a distracted AT&T, which analysts say likely will face tough and prolonged regulatory scrutiny over the proposed merger.
Verizon Wireless is a joint venture of Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD, VOD.LN). Verizon shares recently rose 2.3% to $36.68, making it one of the biggest gainers on the Dow Jones Industrial Average, while American depositary shares of partner Vodafone gained 3.8% to $28.80. AT&T added 0.8%, recently changing hands at $28.15.
"If there's a more stable pricing environment, certainly that's viewed as a positive for Verizon," said Nomura analyst Mike McCormack, noting that AT&T likely won't adopt additional low-cost plans similar to those T-Mobile currently offers. McCormack also said Verizon could benefit as AT&T and T-Mobile USA encounter some "dislocation" amid a multi-year integration process.
To be sure, AT&T's $39 billion deal for T-Mobile contains some worrisome aspects for Verizon Wireless, including a larger and more emboldened rival in AT&T. RBC Capital Markets wrote in a note Monday that Verizon "could see incremental pressure from facing a stronger competitor."
Verizon representatives declined to comment.
Another possible investor concern is that Verizon may be spurred to spend money in reaction to the AT&T deal. While analysts say it is unlikely Verizon would go after Sprint Nextel Corp. (S), they say the company could improve ties with Vodafone, a relationship that has had its rocky points.
"An eventual merger of (Vodafone) and (Verizon) makes more sense than acquiring Sprint, in our opinion," said Kevin Smithen, analyst at Macquarie Research. Vodafone holds a 45% stake in Verizon Wireless.
On Monday, Wall Street focused on the deal's positives for Verizon. Standard & Poor's Equity Research upgraded Verizon to hold from sell, saying an AT&T tie-up with T-Mobile USA would offer Verizon "opportunities to defend and perhaps increase its wireless market share in the near term."
Though increased smartphone subsidies may pressure margins, S&P said the decrease in national carriers and pricing pressure would offset any negative impact.
A joint AT&T/T-Mobile would hold 43% of the market, while Verizon has a 31% share and Sprint 16%, according to Oppenheimer & Co. analysts.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271;
melissa.korn@dowjones.com
-Roger Cheng contributed to this report.