Cogent Communications, an Internet transport and service provider, revealed plans to acquire Sprint’s legacy wireline assets from T-Mobile, but this is no ordinary transaction. According to the terms of the agreement, it appears that the majority of the money changing hands in the transaction will go to Cogent.
According to a statement with the Securities and Exchange Commission, Cogent will pay $1 for Sprint’s fiber backbone and related assets. Meanwhile, T-Mobile has agreed to pay Cogent $700 million over 54 months for “IP transit services,” with a $350 million down payment due within the first 12 months of the transaction.
During a conference call with investors, Cogent CEO Dave Schaeffer stated that the Sprint business now employs roughly 1,300 people, but that figure is expected to decline both before and after the deal closes. He stated that T-Mobile has agreed to pay an additional $25 million to Cogent to assist with severance fees.
The form and timing of T-$700 Mobile’s million-plus payments, according to Schaeffer, “were structured to continue to allow us to expand our cash flow” as it works to revamp the Sprint business.
Analysts on the call appeared doubtful about the deal’s benefits. New Street Research stated in a note to investors on Wednesday morning that the Sprint assets were “losing money when T-Mobile bought them” and “assuming the revenue has continued to decline, the losses are likely to close to, if not more than, the $350MM in transit costs T-Mobile will pay Cogent in the first year after close (and way more than the $100MM T-Mobile will pay Cogent annually for the following 3.5 years).”
But Schaeffer insisted that Sprint’s fiber is a valuable asset that simply needs to be updated to accommodate a more modern product set.
“Today’s technology utilizing the C and L band will support up to 160 wavelengths per fiber and they’ve lit just a handful on a pair of fiber. So, there is substantial, substantial opportunity to utilize this asset much more effectively,” Schaeffer stated. “They are in only about 25 carrier-neutral data centers and their own proprietary facilities and no end-user locations. So, a big part of the synergy is to utilize the Sprint backbone in conjunction with Cogent’s metropolitan assets.”
T-Mobile has already initiated the process of abandoning old products, according to Schaeffer, and Cogent will complete the task. He stated that due to contractual constraints, it could take up to three years to phase out all outdated products and that it will also take time to convert all MPLS services to more current VPN architecture. However, he said that it should be able to shift transit and direct internet access (DIA) service from Sprint’s network to its own considerably faster, allowing it to gain “tremendous economies” by eliminating redundant routers and lowering energy consumption.
As of the closing of the purchase, Schaeffer expects future revenues from the Sprint company to be predominantly derived from VPN, DIA, transit/wavelength, and colocation services.
Cogent’s standalone business posted flat revenue of $148.5 million and a net income of $11.2 million in Q2 2022. Its NetCentric business – which sells connectivity to content providers and other wholesale customers – accounted for 42.6% of sales in the quarter.
Completion of the deal is expected in the second half of 2023.