After spending years trying to buy and build its way into the digital media market, Verizon Communications Inc. has decided to sell out of it.
The company said May 3 that it agreed to sell its Verizon Media business — including brands AOL Inc., Yahoo!, TechCrunch and Engadget — to funds managed by private equity firm Apollo Global Management Inc. for $5 billion. Under the terms of the deal, which is set to close in the second half of the year, Verizon will retain a 10% stake in the media business.
Analysts generally cheered the news, saying Verizon’s digital media foray has long been a distraction. The sale will allow Verizon to focus more attention and resources on its core wireless business, analysts say, at a time when the wireless market is seeing heightened competition on pricing and services.
“Strategically this is the right thing for Verizon to do; the Media business has no material value to its other businesses,” New Street Research analyst Jonathan Chaplin said in a May 3 research note.
Verizon Media generated $1.9 billion revenue in the first quarter, making up about 5% of Verizon’s total revenue of $32.9 billion for the period.
Company executives were positive about the media business when discussing it during Verizon’s recent earnings call, pointing to strong year-over-year growth. Verizon Media’s first-quarter revenue was up about 10.4% from a year ago, the second consecutive quarter of double-digit year-over-year growth for the business. Growth was fueled by strong advertising trends and high consumer engagement.
Verizon CEO Hans Vestberg said the media business recently underwent a transformation under which its leadership reset the business plan, cut costs and reshaped all its products and brands.
“The work has been immense … now we see sort of the fruits of that hard work,” Vestberg said. “I think we have a great future with these guys. They have clearly a good product portfolio, and we know digital is going to be important in the future.”
Verizon largely built its media business through two key purchases: its 2015 acquisition of AOL for $4.30 billion and its 2017 purchase of Yahoo’s operating assets for $4.48 billion. But in more recent years, the company has been selling off properties acquired through those transactions, including The Huffington Post and Tumblr.
Verizon was asked about the possibility of selling Verizon Media during its first-quarter earnings call, with Raymond James & Associate analyst Frank Louthan suggesting it would be a way to pay down debt after Verizon spent $45.45 billion in the Federal Communications Commission’s recent C-Band spectrum auction. In the auction, the FCC sold 280 MHz of spectrum in the 3.7 GHz-3.98 GHz band, a portion of the C-band considered crucial for 5G deployment.
In a May 3 research note following the sale announcement, Chaplin said because Verizon does not break out EBITDA for the media business, it is hard to know whether the deal will lower Verizon’s debt-to-EBITDA leverage ratio. But the analyst is optimistic on this front.
“We would expect this to be a de-leveraging transaction,” Chaplin said.
The sale represents Verizon’s third-largest divestiture in over two decades, ranking only behind two 2015 transactions where its sold wireline operations to Frontier Communications Corp. and wireless towers to American Tower Corporation for $10.54 billion and $5.05 billion, respectively.
Perhaps more important than the deleveraging, however, is the fact that the deal “allows Verizon mgmt. to focus attention and resources on Wireless,” Chaplin said.
This increased focus may be needed as Verizon’s wireless business is facing competition on a number of fronts.
AT&T Inc. launched a series of promotions in late 2020 around Apple Inc.’s iPhone 12 devices, offering to give both new and existing customers an $800 credit on a new iPhone if they traded in an iPhone 8 or more recent device.
While analysts initially viewed the promotions as unsustainable, AT&T confounded expectations by posting first-quarter results that were stronger than expected, posting not only subscriber growth but also higher margins. This could pressure other operators, including Verizon, to compete on price, MoffettNathanson analyst Craig Moffett warned in a research note.
“If Verizon now concludes that AT&T’s promotional stance is to continue, they are faced with a lose-lose choice. Continue to stand by and their growth will suffer further. Respond, and their growth will recover, but their profitability will decline. There are no good options,” Moffett said.
At the same time, Verizon is also facing competition from T-Mobile US Inc. on the network front as T-Mobile continues to roll out 5G service in more locations. “Verizon’s long-standing ‘best network’ positioning looks already to be under pressure,” Moffett said, adding that “in 5G, it is T-Mobile that looks poised to lead.”
T-Mobile, through its acquisition of Sprint, has a great swath of mid-band spectrum, which is important for 5G networks because it balances speed and range, providing broader coverage than high-band spectrum and faster speeds than low-band spectrum.
Verizon sought to catch up to T-Mobile’s mid-band spectrum position through the C-band spectrum auction. But of the 160 MHz Verizon purchased in the auction, only 60 MHz falls in the A-Block, which will be cleared by the end of this year. The rest is not required to be cleared until the end of 2023.
“By the end of this year, T-Mobile will cover twice as much of the country’s population as Verizon, and at much greater spectrum depth,” Moffett said.