A Wall Street Wedding (and a Divorce)

On this podcast of Market Foolery, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman open the week with a trio of relationship stories: The No. 3 and No. 4 wireless carriers in the United States are trying to hammer out a deal get hitched, but T-Mobile (TMUS 0.57%) and Sprint (S) are not the usual suitor-target pair; the Swiss industrial company ABB Ltd. (ABBN.Y 0.18%) is paying $2.6 billion for GE's (GE -2.11%) industrial solutions business, an unloved unit that could thrive in a new home; and finally, Twitter (TWTR) has wooed advertisers to fund all 16 of its planned live-streaming video shows.

A full transcript follows the video.

This video was recorded on Sept. 25, 2017.

Chris Hill: It's Monday, Sept. 25. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday! Nice to be in a nice, cool studio.

Taylor Muckerman: Not too shabby.

Hill: It's going to be 90 degrees again.

Jason Moser: I asked Alexa this morning, I said, "Alexa, what's the weather forecast for today?" She's like, "It's going to be clear and sunny, and the temperature is going to hit around 185 degrees." And I go, "What?" Put those shorts on in late September.

Hill: Yeah, she's not going to steer you wrong.

Moser: No. She's reliable when it comes to the weather. I have to say, man.

Hill: We have a bunch of news for a Monday that is not earnings season. We have a couple of deals working, and a glimmer of hope for Twitter that we will get to. Let's start with telecom. Sprint and T-Mobile are maybe, possibly in the process of getting together. I have to give credit to David Faber at CNBC, who we've had as a guest on the Motley Fool Money show before. He's been doing a lot of legwork on this story. Here's where things are right now: Sprint and T-Mobile are entering into due diligence in what would be a stock-for-stock deal. They are hoping to reach an agreement in the next few weeks. This is, Jason, more complicated than just your typical potential merger, because there are controlling forces outside of T-Mobile and Sprint that are involved here. You have Deutsche Telekom, which, if this deal goes through, because they are the majority owner of T-Mobile, I think I have that right, they own a huge chunk of T-Mobile.

Moser: They do.

Hill: They would reportedly be the controlling owner in this whole deal. But, also, SoftBank from Japan is involved on the Sprint side. Let's start with this. When you first saw this story, what was your reaction?

Moser: I think, generally speaking, it probably makes sense. When you look at this line of work, when you look at this business and you think, what's the main value in one of these carriers? Where does the value lie? And it's in the network. It's the size, it's the reach and the reliability of the network. So, the bigger the network is, the more reliable it is, the more subscribers you'll be able to pull in, and you'll continue to be able to invest in that network and more spectrum, and you become more and more successful as you grow, because you have the resources to be able to continue to grow that network. It's why AT&T and Verizon have done so well for so long. Generally speaking, they have two of the most reliable networks. They're obviously brand names that carry some sway with the consumer. Although, I don't think consumers are really necessarily as brand-focused here. Really, the bottom line is, you want a reliable network. It's just, for the longest time, AT&T and Verizon have communicated that. But, to your point there, there are a lot of pieces in play here. When you look at Sprint, it's controlled by SoftBank, which owns 83% of the shares outstanding there. Sprint, that's about a $34 billion market cap. With T-Mobile, that's controlled, as you said, by Deutsche Telekom. They own 64% of the shares outstanding. And that's about a $53 billion market cap. So, it's two very big companies. But when you look at them in comparison to AT&T and Verizon, AT&T has a market cap of $237. Verizon has a market cap of $203 billion. So, to me, I think this is something that more or less makes sense. I think this is something that probably needs to keep the leadership in Verizon and AT&T up at night, because this really does bring their biggest competitor to the market. And I think if you have someone like John Legere, who may be considered as the leader of this new venture, he's sort of your atypical CEO. He really takes to social media and defying convention in order to grow his business and communicate with the brand stands for.

Muckerman: Yeah, it really seems like A Tale of Two Companies. You have T-Mobile growing faster than its competitors, Sprint not so much. T-Mobile spending a bunch of money to grow, Sprint cutting costs. Now you're going to bring them together. T-Mobile has already been using Sprint's network for its customers. And you've seen T-Mobile be pretty innovative in the plans that it offers and the marketing that they deliver. And Verizon and AT&T have tried to answer that, and now it's going to be a little bit more difficult for them with bringing that scale that Sprint is going to offer them. And the money that they've been spending has come from failed previous M&A attempts. So, they've put that money to good use, and maybe they're trying to take advantage of some looser restrictions on antitrust with the new party in the White House.

Hill: I don't own any of these stocks, but selfishly, from an entertainment standpoint, I hope John Legere ends up running this company if this deal goes through. Although, in all seriousness, you look at SoftBank and the interest they would have in this company, if it goes through, and Masayoshi Son, who heads up SoftBank, is probably going to have some ideas of his own of how this should be led. And it may just be as simple as, "John, you're in charge, but you're going to take my phone call whenever I want."

Moser: Yeah, I would imagine. John Legere reminds me of a Jeff Bezos-style CEO in the sense that he seems to be, at least, very customer-centric.

Hill: He's a lot more outgoing than Jeff Bezos.

Moser: No question. He's got the slow cooker Sundays going. This guy is on my wavelength, so to speak. But that's where I think a real opportunity lies for a business like this, if you were to see this combined entity here. Someone who's just not afraid to get out there, defy convention a little bit, put a face on the brand. You can't really sit there and put a face on the brand of Verizon or AT&T.

Muckerman: Nope.

Moser: They have reputations for not-so-great service. And on the T-mobile side, you have a guy with John Legere, he's embracing social media, he's embracing customer-centric business. And I think that's a big advantage they could potentially play into here. I dug in, you know how we talk about always wanting to find these big long-term trends, invest in these big long-term trends, figure out ways to make money from these big long-term trends. I dug a little bit into this, and thanks to some great work from one of my colleagues, Paul Chi over on MDP did in regard to Verizon, we own Verizon in MDP today, and Cisco every year comes out with this white paper that goes over the mobile global traffic space, where it was, where it is and where it's going. And it's fascinating to look at the numbers here. If you look at global mobile traffic, it grew 63% in 2016 to 7.2 exabytes per month. "Now, Jason," you're saying, "What is an exabyte?" Well, you're in luck, I can tell you. An exabyte is actually about 1 billion gigabytes. You know the size of a gigabyte. That's what we base most of our plans on. So, think about 1 billion gigabytes. 7.2 exabytes. That's a little bit more than 7 billion gigabytes per month that's traveling around the world. It's projected by 2021 to hit close to 50 exabytes per month. So, there's this massive opportunity there in all of this global traffic.

Hill: It's going throw that much in four years?

Moser: That's what the projection is. And think about it this way, most of the world out there is still such an opportunity, because so many folks out there are still not yet connected. There are a lot of folks that are just getting onto the mobile network and figuring out the advantages of what mobile technology can offer. So, there is just this massive opportunity there in regard to the growth as far as the traffic goes. So, I think it's an opportunity for all three players. AT&T, Verizon, I think Sprint and T-Mobile pulling together here and becoming a really viable third player in this space. This gives them a real opportunity, because it's clear to see the long-term trend where it's headed.

Muckerman: Another area you could look at to take advantage of that is the tower operators. You have companies like American Tower and Crown Castle, you can't operate these networks without them. They're charging the network operators rent to basically hold their antennas in all the right places.

Hill: Really quick before we move on, how big a concern do you think is the antitrust issue, which, Jason, you talk about Verizon and AT&T being up at night. If I'm involved in the leadership of either of those companies, I'm absolutely screaming antitrust because this is the third and fourth largest telecom getting together. And even though if you just look at a pie chart, if this deal goes through, you're basically looking at a pie that's been cut in three pieces, they're each going to have about a third. So, on the surface of it, I look at it -- again, I have no skin in the game, I just look at it and think, "OK, everybody is essentially on equal footing." But it really does seem like the FCC and the Justice Department are going to take a long, hard look at this, and if nothing else, slow the deal down.

Moser: Yeah, I think you're right. I think they will go through this with a fine-tooth comb, and they'll make sure they dot all their i's and cross all their t's. But at the end of the day, I think this does nothing but really help the consumer. From that perspective, I don't understand why they would ultimately nix this deal. Bottom line, at the end of the day, with this huge long-term trend, a big world, plenty of opportunity and share to still grab out there, I think bringing another viable competitor in the space only makes sense.

Hill: John Flannery has been the CEO of General Electric for about an hour and a half, and already making his mark. GE has sold its industrial solutions division to ABB, which is a maker of power grids that's based in Switzerland. $2.6 billion deal, and I think you indicated this, Taylor, when we talked about Jeff Immelt finally stepping aside as CEO, and one of the things I think you raised at that time was the potential for Flannery to go in the direction of more streamlining.

Muckerman: Yeah. It certainly seems that way. You've got GE water, the pending divestiture of that. Now you're looking at this business, $2.7 billion being sold for, brought in $2.6 billion in revenue, so it was being sold for slightly less than one times sales. Only brought in about $160 million in profit last year, so it's been underperforming. But, it's being sold to a company that can probably right-size a few things in ABB, the Swiss company. You look at the market, there's people out there that don't expect this to be the last divestiture from Flannery. He's going to probably talk a little bit about it when they release third quarter earnings on Oct. 20, and then probably fully unleash a broader strategic plan at their annual analyst meeting on Nov. 13. So, still probably a few words to be spoken by him, but folks think you could probably even see the healthcare division be parted out or completely sold, and that's the division he holds very near and dear to his heart.

Hill: That would be pretty bold, don't you think?

Muckerman: Yeah. I haven't looked too much into it, but I have seen a few analyst notes suggesting that could be the case. Also lighting and transportation. So, certainly some big divisions out there that could make a big splash in the M&A market.

Hill: Before we get to our next story, gotta give a shout out to some of our colleagues here at The Motley Fool, because this weekend, in the heat in D.C., was the Ragnar relay. For those unfamiliar, this is a 207 mile relay race with teams of a dozen people.

Muckerman: Oh, and it's been hot here lately.

Hill: Oh my goodness. I was talking to a couple of them. Everybody does three legs, so everyone is running in the neighborhood of 16 miles or so. And it's continuous, it goes over the span of a couple of days. And once again, I'm happy to say that the Running of the Fools, which is the official name of The Motley Fool's team, came in first in the corporate division out of 25 teams, and 9th overall out of 326 teams.

Moser: Wow.

Hill: So, kudos to: Mark Brooks, Mike Padilla, Ed Gaughran, Matt McKinney, Derek Newman, Denise Coursey, Nicole Naworal, Brian Faherty, Tracy Dahl, and a little closer to the podcasting investing space, Taylor Harris, who occasionally fills in behind the glass, JP Bennett, who's part of the Motley Fool Pro and Options team, and investor at large Tim Hansen.

Moser: This is where you queue in that Phish song, "Run Like An Antelope," right? It's just perfect for that. That's what they probably ought to name the team from here on out. It would be inspiring. It's good music to run to.

Muckerman: There's probably a few Phish fans in that Fool van.

Hill: Probably. But, I think if you're one of the other teams and you're looking at the leaderboard and you see Running of the Fools up at the top spot, that's got to be a little deflating. As I mentioned at the top, a glimmer of hope for Twitter. Back in May, Twitter previewed for advertisers 16 different live video shows that it was planning to stream this year, including shows from producers like Live Nation, BuzzFeed, Major League Baseball. This morning, Recode reporting that the advertisers are buying, and in fact, Twitter has secured ad commitments for all 16 shows. So, if nothing else, this is an encouraging sign. Jason, we don't know exactly the amount of money involved here. But presumably, Twitter has structured this in such a way that the advertising supports the shows in a profitable way.

Moser: Well, glimmer of hope. Those are your words, not mine. Let's be very clear here. No, all kidding aside, I guess, yeah, glimmer of hope. I was fascinated to see this was actually the case, because normally, it's one thing for them to present this strategy and this plan and the things that they would like to do, but that's sort of expectations, and then reality sets in and then you can only do what you can really fund. But, to see that they were able to actually fund all this stuff, it's certainly encouraging for them. I certainly have been very critical of their discovery efforts when it comes to the live. If you're going to center your business around a strategy of live video, then it would make sense that you want to make sure your users can actually find said video. And Twitter has made it very difficult, I think, for anyone to find much of the live video that's going on on that platform. Now, with that said, it's a quality experience. The video is of good quality. And I do think it's an interesting way to bring the second screen together with the first screen on one screen. I mean, I like the stuff that they're doing, and I think the content they're looking to produce is compelling, and it's because it doesn't focus on one big audience. It focuses on a big cross-section of audiences. So, rather than finding that one thing that everybody wants to watch, there's a lot of different things that smaller audiences are going to want to watch. So it's a little bit of something for a lot of folks out there. And I like that. I think that's good. I think this is going to give them an opportunity to try to monetize a little bit more on the advertising front, because I think that for their product, for that platform, I think video is really the only hope. It's difficult to monetize, advertise, when you're scrolling through that Twitter feed so fast. Whereas, if someone's watching a video, and you can capture those eyeballs either pre-roll, midroll, or post-roll, then that's good. So, it's a good thing. I think the burden of proof is obviously still on them to show that the demand is out there. But the fact that they were able to fund all of these shows does imply that perhaps the demand is there in some capacity. 

Muckerman: One partner I'm interested to see how it works out with is Live Nation. You see sports, everybody wants sports, everybody wants news, but here you might even get some live concerts on Twitter, which I think is a pretty interesting aspect of --

Moser: And they've taken that step. I thought it was really neat to see, a few months ago they did the Zac Brown Band opener in Atlanta, streamed the whole thing live. We watched it on a big screen at home. That's a really neat experience.

Muckerman: For sure.

Moser: I think the more that they can do things like that, the better off they're going to be. They just still seem to be moving very slowly. You have to pick the pace up a little bit. It's still hard to get a full read on what management is actually doing. But, all things considered, I'll still hang on to my shares. It's a big network. It's become more relevant today than ever before. So, it still matters.

Hill: Back in May when they unveiled this, they essentially had their own mini upfront for advertisers. I assumed it was going to be somewhat akin to what we've seen Amazon do with its original programming, where Amazon from time to time has put out a bunch of shows where they've said, "Here's a bunch of first episodes, and we're going to see what people vote for, we're going to see what people actually watch, and we're going to make our decision to back shows based on viewers' appetites." So, I just assumed, here's 16 shows, there's going to be greater interest in some than others. They're not going to run all 16 of these things. And in fact, to your opening point, Jason, the appetite's there.

Moser: And the thing is, when you look at the actual content that they're slinging out there, it definitely fires on their strengths. It's focused on sports, on news, on entertainment. It's NBA, it's baseball, it's an NFL talk show, it's news with, whether it's Cheddar or Bloomberg, it's entertainment with Live Nation, Viacom. I mean, they do have data. And they understand what their users like, and they understand the age demographics of who's doing what. And so, certainly they're catering that lineup around that. It's just a matter of really proving that it has staying power. This is definitely a positive step. But there's still plenty left to do.

Hill: Thanks for being here, guys.

Muckerman: Appreciate it.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!