T-Mobile US (NASDAQ: TMUS) today announced that it has agreed to sell its Wireline Business to Cogent Communications (NASDAQ: CCOI), a facilities-based network provider, for a purchase price of only $1.00. At the same time, T-Mobile has agreed to utilize IP transit services delivered by the Wireline Business for 4.5 years following closing, meaning that T-Mobile is effectively paying Cogent $700 million to offload this “legacy” unit.
Cogent is acquiring T-Mobile’s Wireline Business, comprising the legacy Sprint U.S. long-haul fiber network, which provides the company with an owned network asset. T-Mobile previously acquired this business as part of its $31.8 billion purchase of Sprint Corporation, which closed in April 2020.
Upon completion of the transaction with Cogent, T-Mobile will focus on providing wireless services, including 5G, to consumers and enterprises as the core of its future growth strategy. As part of the sale of its Wireline Business, T-Mobile expects to recognize a total pre-tax charge of ~$1 billion in Q3 2022, as T-Mobile will mark-down the carrying value of the unit and establish a liability for future contractual payments.
On a day when the S&P 500 rose 1.83%, T-Mobile US (NASDAQ: TMUS) saw its share price rise by 2.53%, while Cogent Communications (NASDAQ: CCOI) had its stock price plummet by -8.28%, as investors reacted negatively to the transaction.
Business Overview – T-Mobile’s Wireline Business
T-Mobile’s Wireline Business provides wireline communication services to domestic and international customers via the legacy Sprint Wireline network, formerly known as the Sprint Global Markets Group. Previously, the operation of the legacy Sprint CDMA and LTE wireless networks were supported by the legacy Sprint Wireline network. However, during Q2 2022, T-Mobile retired the legacy Sprint CDMA network and began the shutdown of the LTE network.
Overall, the T-Mobile Wireline Business generated $560 million of revenue in 2021 and comprised 1,300 employees. However, this “legacy” business has been experiencing revenue declines of ~10% per year and Cogent expects that this rate of decline will persist between signing and closing of the transaction.
As such, by closing, Cogent anticipates that T-Mobile’s Wireline Business will be producing a revenue run-rate of $450 million, driven by a decision to end a number of non-core products. In terms of EBITDA, the wireline unit will be losing about -$180 million of EBITDA in Year 1 and Cogent expects to reduce this negative performance to be less than a -$80 million EBITDA loss in Year 2.
Post-closing, Cogent will assume full operating responsibility for T-Mobile’s Wireline Business and facilities.
T-Mobile’s Wireline Business includes the following products:
- Multiprotocol Label Switching (MPLS): Cogent expects to convert the MPLS product to virtual private LAN service (VPLS) and wide area network (WAN) service. In turn, Cogent anticipates offering customers the ability to migrate from their legacy MPLS VPN solutions to modern Ethernet / VPLS or SD-WAN / DIA solutions for their corporate needs
- Dedicated Internet Access (DIA): symmetrical Internet access delivered over Ethernet with multi-gigabit per second (Gbps) speeds, which is sold to corporate customers
- Transit: known as IP transit, this wholesale internet connectivity service routes traffic to different places on the Internet and is sold to corporate customers
- Wavelength: a channel of light that carries telecommunications traffic through the process of wavelength-division multiplexing, which combines multiple channels onto a single fiber
- Colocation: provision of turn-key data center space to multiple customers, within the same data halls, for the purposes of hosting IT infrastructure, including servers
- Non-Core: products will be supported through the customers’ contract terms or for a transitional period, but will not be continually supported by Cogent going forward. For example, these non-core products include SIP termination, wholesale voice minutes, and low-capacity managed services
T-Mobile (Sprint Wireline) – North American Network Map
As shown below, T-Mobile’s Wireline Business consists of 20,305 owned route miles, of which ~19,000 are long-haul (inter-city) route miles and ~1,300 are metro (intra-city) route miles. Additionally, the unit possesses 16,843 leased route miles.
Beyond North America, T-Mobile’s Wireline Business includes an international network of leased facilities such as points-of-presence (PoPs) and lit leased fiber.
Fiber Optic Plant
The vast majority of the routes in T-Mobile’s Wireline Business are armored direct burial fiber optic cable, with only some network sections being in conduit. This fiber is placed predominantly on railroad rights-of-way, which have historically been very secure and have had very few cuts. Most of the rights-of-way are truly “unique” and cover city pairs that are in high demand.
Additionally, most of the physical routes of T-Mobile’s Wireline Business have no other providers on them, with the rest of the industry sharing rights-of-way that are different than this unit’s rights-of-way. Therefore, Cogent is acquiring an alternative, redundant network in the majority of city pair instances.
T-Mobile’s Wireline Business has an average strand count of ~48 strands per route mile across its footprint. However, the network’s strand count varies dramatically by route, with low-capacity routes having ~12 strands per route mile, while high-capacity routes have ~144 strands per route mile.
Transaction Rationale – Cogent Communications
Cogent Communications divides the transaction rationale for acquiring T-Mobile’s Wireline Business into three categories, including infrastructure ownership, consolidation & scale, and product expansion & market reach.
Cogent Communications will substantially increase its fiber network footprint, and, in particular, this fiber will be owned in fee simple, rather than leased under indefeasible rights of use (IRUs) with finite terms. As part of Cogent’s acquisition of T-Mobile’s Wireline Business, the company is gaining 20,305 owned route miles.
Eventually, T-Mobile’s owned wireline infrastructure will replace Cogent’s current leased network. As such, this transaction transforms Cogent into a larger, facilities-based carrier through ownership of its own nationwide network.
Consolidation and Scale
Cogent Communications’ owned data centers will grow by 47 new facilities, increasing from 53 to over 100, as part of integrating the legacy Sprint Wireline network. This integration is anticipated to result in the elimination of redundant locations, most of which are currently leased. As such, the combined company’s data center presence will expand from 600,000 square feet to over 1 million square feet.
Cogent plans to migrate the acquired network assets to its more efficient architecture, supporting IP over dense wavelength-division multiplexing (DWDM) for greater wavelength count and throughput per wavelength. For example, a DWDM system typically has the capability to multiplex up to 40 wavelength channels. To this end, Cogent’s Chief Executive Officer, Dave Schaeffer, highlighted his company’s ability to deploy 400G and 800G wavelengths.
Additionally, Cogent’s consolidated routing infrastructure will facilitate higher port densities. At the same time, the company will be able to realize more efficient utilization of off-net facilities (i.e., other carriers’ circuits) due to greater point-of-presence (PoP) and customer densities.
Finally, in terms of products, Cogent will gain scale in the dedicated internet access (DIA), transit, virtual private networks (by transitioning from MPLS to VPLS), and colocation data center sectors.
Product Expansion and Market Reach
Cogent Communications’ acquisition of the legacy Sprint customer base comprises ~1,400 business enterprises, outside of Cogent’s typical customer profile. Overall, Cogent expects to offer higher capacity and improved services to these acquired customers in order to maximize customer retention.
At the same time, the transaction increases the number of Cogent on-net products, which typically haver higher contribution margins.
Cogent is entering the North American market for wavelength sales, which are point-to-point high-capacity services used by large corporates and other service providers. Importantly, the North American wavelength market currently produces revenue of $2 billion annually and is expected to grow at 7% per year for the next six years.
Presently, the wavelength market is dominated by Lumen Technologies (NYSE: LUMN) and Zayo (backed by DigitalBridge and EQT).
Cogent’s U.S.-owned and carrier-neutral data center footprint, which counts 800 locations, provides the company with a significant reach to sell wavelengths. Moreover, Cogent’s net-centric sales force of 200+ personnel will substantially increase the sales effort that T-Mobile (Sprint) currently devotes to wavelength sales, which is ~60 salespeople.
Historically, Cogent has been a purchaser of dark fiber capacity. However, through T-Mobile’s Wireline Business, Cogent is gaining entry into the sale of dark fiber nationally.
The value of the majority of these acquired dark fiber assets is due, in-part, to the unique routes and rights-of-way that they utilize, as the routes are not shared with other operators.
Cogent is growing via additional international operating licenses, such as in India and Malaysia, which are large markets where Cogent has no existing presence.
Transaction Overview – T-Mobile Sells Wireline Business
T-Mobile US, Inc., through the entities Sprint Communications LLC and Sprint LLC, has agreed to sell the U.S. long-haul fiber network (including non-U.S. extensions) of Sprint Communications, known as the Wireline Business, to a newly formed direct subsidiary of Cogent Communications named Cogent Infrastructure, Inc.
Purchase Price and Supply Agreement
T-Mobile and Cogent Communications have agreed to a $1.00 purchase price in consideration for the Wireline Business. Additionally, T-Mobile has separately entered into a supply agreement to utilize the IP transit services of Cogent’s soon-to-be acquired Wireline Business for a period of 54 months (4.5 years). In exchange for these IP transit services, T-Mobile will pay Cogent $700 million, consisting of:
- Year 1: $350 million in equal monthly installments (i.e., $29 million per month) during the first year after transaction closing
- Subsequent Years: $350 million in equal monthly installments (i.e., $8 million to $9 million per month) over the subsequent 42 months (3.5 years)
Debt and Equity Financing
Cogent Communications does not plan to issue any new debt or equity in order to finance the acquisition of T-Mobile’s Wireline Business. Also, Cogent is only assuming minimal liabilities (trade payables) as part of the transaction. Furthermore, the transaction is not expected to be dilutive to Cogent’s existing shareholders.
The T-Mobile and Cogent Communications transaction is subject to receipt of regulatory approvals and is expected to close in the second-half of 2023. More specifically, Cogent notes a targeted closing date in or prior to December 2023.
Post-closing of the T-Mobile transaction, Cogent Communications expects its revenue base will be ~$1.1 billion, or 180% of its current $600 million run rate. Also, the company has set a multi-year revenue growth target post-closing of 5% to 7% annually. By 2028, Cogent targets aggregate revenue of over $1.5 billion.
After a projected initial decline in EBITDA, Cogent targets EBITDA margins for the combined business in the low-to-mid 30% range, within five years. Subsequently, the company intends to expand EBITDA margins, over time, to ~45%.
Transaction Advisors – T-Mobile and Cogent Communications
T-Mobile’s financial advisor was Houlihan Lokey. Additionally, T-Mobile’s legal advisor was DLA Piper.
Cogent Communications’ financial advisor was Morgan Stanley. Additionally, Cogent Communications’ legal advisor was Latham & Watkins.
Cogent Communications – Overview
Cogent Communications is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space. The company’s optical fiber network provides services in over 219 metropolitan markets across 51 countries.
As of Q2 2022, Cogent Communications has a network backbone, leased on indefeasible right of use (IRU) contracts from 301 different dark fiber suppliers around the world. The company serves 1,409 carrier-neutral data centers with its fiber network and its network connects to 3,095 total buildings, including 1,826 large multi-tenant office buildings in major North American cities.