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AT&T Inc. (T) Stock Wins Contract to Build Network for First Responders

InvestorPlace logo InvestorPlace 3/31/2017 John Kilhefner

If you’re an AT&T Inc. (NYSE:T) stakeholder of any stripe, you’re either about to see your wallet get fatter and/or your connection get faster.

AT&T Inc. (T) Stock Wins FirstNet Contract to Build Network for First Responders© Provided by InvestorPlace AT&T Inc. (T) Stock Wins FirstNet Contract to Build Network for First Responders

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While you might not have noticed by the less-than-rousing 60-basis-point gain, AT&T scored a decisive victory Thursday — the FirstNet contract, a 700 MHz LTE network to be used exclusively by our nation’s first responders.

The company plans to spend $40 billion (not including the $7 billion federal grant) over the life of the contract — 25 years — and will commercialize the spectrum along with four partners: Motorola Solutions Inc (NYSE:MSI), Sapient Corp, General Dynamics Corporation (NYSE:GD) and Inmarsat Plc, London.

Bernstein analysts including Pierre Ferragu see this as mostly bullish for all involved.

Here’s why:

What Is FirstNet?

FirstNet was first proposed after Sept. 11, 2001, as a national wireless broadband network for police, firefighters and all first responders of the United States. As Commerce Secretary Wilbur Ross put it, it “will change an untenable status quo by providing first responders with the tools they need to keep us safe” and serves as a “prime example” of the power of partnerships between the government and the private sector.

When implemented, FirstNet would free first responders from the tangles of everyday network congestion, which is widely thought to have contributed to the chaos on the ground among rescuers during the Sept. 11 attacks. AT&T CEO and Board Chair Randall Stephenson has said that “our first responders … deserve the very best technology” and it’s up to his company and ragtag assortment of telecoms to get it there.

While initially recommended in 2004, the legislation that got FirstNet off the ground began in 2012, and it allows states the option to build their own networks. To work properly, FirstNet would need state participation … and states can choose to opt out. And as the Wall Street Journal writes, a “politically connected startup” that lost out on the contract in favor of AT&T is lobbying to coerce states to do just that.

Still, the buildout of such an initiative is expected to create 10,000 jobs over two years. This huge investment in the communications infrastructure in the U.S. will, in theory, aid 320 million people. It’s a chintzy feather in the Donald Trump administration’s cap, and something we’re likely to see President Trump himself trotting around the media.

But what’s in it for AT&T Inc. and T stock holders?

What AT&T Gets Out of It

In its fully functional form, FirstNet seeks to be self-funded by subscription fees from the first responders themselves, and subsidized through the sale of leftover spectrum by T to private companies. And AT&T gets some huge pieces of spectrum to play around with, including $6.5 billion toward its construction (awarded out as milestone-payments over five years).

It’s a blow to Verizon Communications Inc. (NYSE:VZ), as AT&T will have 25 MHz of spectrum allowed for use within its own commercial network, yielding speedier connections for the telecom’s customers and a solid marketing pitch to boot. That goes a long way toward attracting fresh blood to the T stock ecosystem.

Further, AT&T will be able to connect FirstNet users with its own network assets, a value of $180 billion.

AT&T’s network should also provide “near real-time information on traffic conditions to determine the fastest route to an emergency,” and will facilitate the use of wearables and drones to capture high-quality, real-time images of emergencies, such as fires or floods. That could potentially widen the revenue streams for the telecom’s own wearables.

So if this is such good news for T stock holders then why did T stock react like a fish flopping around a wooden deck? Because it was already “widely anticipated,” as Bernstein put it. It’s not, however, a certainty that the FirstNet rollout goes over smoothly.

Still, it’s a solid victory for AT&T, and doubly so for the much-smaller MSI, which Bernstein sees as reaping the most reward:

“… this is positive news for our space — Important questions are still pending about the magnitude of the upside, its timing and how it will flow through to our three companies. At this stage we see MSI as the most positively impacted, closely followed by Ericsson (NASDAQ:ERIC) and then Nokia Corp (ADR) (NYSE:NOK) as a likely third beneficiary, although by a less certain and lower magnitude.”

T stock is up 17 basis points Friday morning, but still down 1.5% for the year. That said, you could do a lot worse than this telecom right now.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.


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