By Drew FitzGerald 

Verizon Communications Inc. said it has agreed to buy TracFone, a provider of wireless prepaid services, in a deal worth nearly $7 billion in cash and stock, further consolidating the U.S. cellular market.

TracFone, a unit of Mexico's América Móvil SAB, has about 21 million prepaid customers in the U.S. under its namesake as well as budget brands StraightTalk, Net10, SafeLink and Simple Mobile. The company doesn't run its own physical network in the U.S. and instead rides on other cellphone carriers' systems for a fee and then resells service under its own brands.

The move plunges Verizon deep into the prepaid market, a sector it has largely avoided by catering to more lucrative customers who pay for wireless service after it is rendered. Customers on prepaid plans tend to switch providers more often, which operators consider a risk.

Verizon is the biggest U.S. cellphone carrier with about 120 million connections, including tablets and other devices, but it has been competing in a mature market that is now dominated by three providers. T-Mobile US Inc. became the No. 2 provider by subscribers after swallowing Sprint earlier this year.

Verizon said it served about four million prepaid wireless customers at the end of June. Adding TracFone would vault it to the top spot in the prepaid market. T-Mobile, owner of the Metro service, has more than 20 million prepaid customers. AT&T serves about 18 million U.S. prepaid customers mostly through its Cricket brand.

Verizon consumer chief Ronan Dunne said TracFone would remain a distinct business that will benefit from access to a wider range of cellphones, smart devices and connected home products through the carrier's ownership.

"It's a business we know well but it's not one where we've been driving our own destiny," Mr. Dunne said in an interview. "They're a winner in this segment already. We see this as a growth platform."

TracFone, backed by Mexican billionaire Carlos Slim Helu, grew into the biggest U.S. cellphone reseller by catering to frugal customers through Walmart Inc. stores and other independent dealers. Its StraightTalk service offers data plans for as little as $34 a month. TracFone offers service for as little as $15 a month with limits on internet data as well as the number of texts and phone calls.

About 13 million of TracFone's subscribers already use Verizon's network through an existing wholesale agreement. Like Consumer Cellular and Republic Wireless, these brands have wholesale deals to rent space on existing cellular networks and then resell services under their own brands.

The coronavirus pandemic helped boost TracFone's subscriber numbers earlier this summer, though the company's growth has flagged in recent years under pressure from AT&T Inc. and T-Mobile prepaid plans.

New wireless plans from cable operators Comcast Corp. and Charter Communications Inc., which also resell network bandwidth provided by Verizon, have added more competition for TracFone.

After moving in lockstep for years, Verizon and AT&T have pursued different strategies. With TracFone, Verizon is investing in its core business of cellular connections. AT&T branched out into the television and media business by acquiring DirecTV in 2015 and Time Warner in 2018. AT&T is now exploring a sale of the satellite-TV business it acquired from DirecTV.

Verizon said the TracFone deal will include about $3.125 billion of cash and $3.125 billion in Verizon shares. TracFone could get an additional $650 million cash payment tied to performance measures and other commercial arrangements, bringing its total potential price to $6.9 billion.

Mr. Dunne said some of the added payments are tied to the prepaid service's ability to hit revenue targets and to successfully move more accounts to Verizon's network. TracFone relies on T-Mobile and AT&T network infrastructure for some of its connections.

Shares of America Movil gained about 8% in New York trading Monday. Verizon shares rose less than 1%, lagging behind the broader market.

Wall Street analysts said Verizon could boost TracFone's profitability by simply shifting more of its customers running on AT&T and T-Mobile networks to Verizon's system. New Street Research LLC estimated Verizon could save about $800 million a year this way.

The deal is subject to approval from antitrust and telecom regulators. Federal competition enforcers have traditionally viewed virtual-network operators like TracFone as resellers of wholesale network capacity owned by companies like Verizon that own the cell-tower equipment and lines that carry their traffic, so the deal is unlikely to attract as much scrutiny as T-Mobile's Sprint takeover did when it was announced in 2018. Verizon said it expects its transaction to close in the second half of 2021.

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com

 

(END) Dow Jones Newswires

September 14, 2020 18:01 ET (22:01 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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