Internet transport and service provider Cogent Communications announced plans to acquire Sprint’s legacy wireline assets from T-Mobile, but it’s not your average deal. Under the terms of the pair’s agreement, it appears the bulk of the money changing hands in the transaction will actually flow in Cogent’s direction.
A filing with the U.S. Securities and Exchange Commission shows Cogent will pay a $1 purchase price for Sprint’s fiber backbone and related assets. T-Mobile, meanwhile, has agreed to pay Cogent $700 million over the course of 54 months for “IP transit services,” with an initial installment of $350 million due in the first 12 months after close.
During a call with investors, Cogent CEO Dave Schaeffer said the Sprint business currently has around 1,300 employees but he expects that figure to fall both before and after the deal’s close. He noted T-Mobile has agreed to pay up to an additional $25 million to Cogent to help it cover severance costs.
Schaeffer added the structure and timing of the $700 million-plus in payments from T-Mobile “were designed to continue to allow us to grow our cash flow” as it works to revamp the Sprint business.
Analysts on the call appeared skeptical about the merits of the deal. In a note to investors on Wednesday morning, New Street Research noted the Sprint assets were “losing money when T-Mobile bought them” and “assuming the revenue has continued to decline, the losses are likely 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.”
Schaeffer said T-Mobile has already begun work discontinuing obsolete products and Cogent will finish the job. He noted it could take as much as three years to phase out all legacy products due to contractual obligations and will also take time to convert all MPLS services to more modern VPN architecture. But he added it should be able to migrate transit and direct internet access (DIA) service from Sprint’s network to its own much faster, allowing it to achieve “tremendous efficiencies” by removing redundant routers and reducing energy use.
In terms of go-forward revenues from the Sprint business, Schaeffer said he expects those to primarily to stem from VPN, DIA, transit/wavelength and colocation services as of the deal’s close.
Cogent's standalone business posted flat revenue of $148.5 million and net income of $11.2 million in Q2 2022. It's 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.