T-Mobile US Inc (TMUS.O) is doubling down on 5G services after it struck a deal on Wednesday to sell its wireline business to Cogent Communications Holdings Inc (CCOI.O) for $1, while taking a $1 billion charge on the transaction.
The deal includes a $700 million contract under which Cogent will provide transit services to the carrier for 4-1/2 years after the deal closes.
T-Mobile has been turning its attention away from the wireline business that includes assets from its $26 billion acquisition of Sprint Corp in 2020.
In the most recent earnings call, Chief Executive Michael Sievert said the company was no longer using Sprint infrastructure to support its wireless business and that an asset review was underway.
The wireline business houses communications systems, data processing equipment and fiber optic cable, and earned $739 million in revenue last year.
“We think that T-Mobile must be receiving some sort of discount on the IP transit services that they will be buying from Cogent contractually, and they will save on the costs that they’d otherwise have to keep, maintain and improve (the infrastructure),” said Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
For Cogent, the deal provides a U.S. long-haul network that could eventually replace its current leased network and help expand the company’s product set to consumers and enterprises.
Cogent expects its revenue base to be about $1.1 billion, or 180% of its current $600 million run rate, CEO Dave Schaeffer said on a conference call.
The deal is expected to close in the second half of 2023, and T-Mobile said it would book the pre-tax charge in the third quarter of 2022.
Morgan Stanley served as the financial adviser for Cogent, while Houlihan Lokey was T-Mobile’s financial adviser.