While Verizon Communications Inc. has long focused on its higher-margin postpaid business, the U.S. telco is making a big leap into prepaid.

Verizon on Sept. 14 agreed to buy TracFone Wireless Inc., America's largest prepaid, no-contract wireless service provider. TracFone is best known for its namesake brand as well as Straight Talk, SIMPLE Mobile, Total Wireless and Net 10, among others. TracFone counts approximately 21 million subscribers across its family of brands. By comparison, Verizon had just 4 million prepaid customers at the end of the June quarter.

While postpaid subscribers pay a recurring monthly bill, prepaid customers sign up with no contract and pay for voice minutes, texts or mobile data prior to usage. Postpaid customers tend to be more profitable than prepaid subscribers as they generally remain with a carrier longer, but the prepaid business targets value-minded customers.

Analysts agree that the deal — valued at $6.90 billion, including a possible $650 million performance-based cash consideration — is a smart one for Verizon, as it will give the company a much stronger foothold in the prepaid market. Moreover, they see the deal as financially attractive, as Verizon expects the purchase to be accretive to free cash flow and EBITDA on day one after the deal closes.

Fitch Ratings analyst John Culver said in a note that the transaction provides "strategic benefits" to Verizon, given the telco's current lack of a "significant retail presence in the pre-paid or value segment of the market."

"It's easy to see why Verizon wanted TracFone," MoffettNathanson analyst Craig Moffett said in a research note, noting that TracFone's slim profit margins will "immediately spike" as the company's customers are transitioned onto Verizon's network.

TracFone, which does not operate its own network, currently relies on mobile virtual network operator agreements with a variety of network operators, including Verizon, AT&T Inc., T-Mobile US, Inc. and United States Cellular Corp. Moffett estimates that of TracFone's 21 million prepaid subscribers, two-thirds already ride on Verizon's network.

"For those customers, the margins will immediately rise as variable costs disappear onto Verizon's preexisting network. For the remaining one-third, margins will rise even more, as off-net traffic is moved on-net," the analyst said.

Given the price tag, Kagan analyst John Fletcher said Verizon "got an excellent deal for TracFone."

"Operators generally like to scale as it leads to cost redundancy eliminations and better margins," he said, noting that the deal also gives Verizon about 21 million additional customers to whom it can upsell other services. Kagan is a media research group within S&P Global Market Intelligence.

"Bundles of multiple monthly media bills — mobile, home internet and video — tend to help to lower overall churn for large operators," he said.

At $6.90 billion, TracFone represents Verizon's second-largest acquisition in the past 10 years, ranking behind its 2014 purchase of the 45% stake in Verizon Wireless that was at the time controlled by Vodafone Group PLC.

New Street Research analyst Jonathan Chaplin also likes the financials and believes the deal is likely to win regulatory approval and close on schedule in the second half of 2021, regardless of whether a Republican or Democrat is in the White House.

However, he notes that the buy represents a strategy shift for Verizon.

"They have eschewed interest in the prepaid market before now. It would seem to support our view that value will shift from postpaid to prepaid in a recession," Chaplin said in a Sept. 14 research note.

América Móvil SAB de CV, TracFone's current parent, said its U.S. subsidiary had a "very strong" June quarter, tallying net additions of 214,000, compared to 164,000 disconnections a year earlier. "May was especially strong as a result of US Government Stimulus and additional unemployment benefits reaching a broad proportion of the population and people sought attractive communication solutions," the company said.

Kagan's Fletcher said the distinction between prepaid and postpaid has become "blurry" in the U.S. in recent years, as prepaid providers now offer automatic refill options that work almost like monthly service plans. Moreover, postpaid operators no longer subsidize subscriber phones, instead relying on "equipment installation plans," or monthly phone payments.

One major asset that TracFone brings to the table is its vast number of distribution outlets, according to Moffett.

Straight Talk phones and service plans are available at more than 3,000 participating Walmart locations nationwide. All told, TracFone counts a network of more than 90,000 retail locations across the country.

For Moffett, the biggest surprise from the transaction is not that Verizon is interested in the prepaid market. Rather, it is the willingness of America Movil to sell its U.S. business.

He sees it as a sign that the U.S. wireless market is becoming increasingly concentrated, especially in the wake of T-Mobile's purchase of Sprint Corp., completed earlier this year. TracFone previously had mobile virtual network operator agreements with both T-Mobile and Sprint.

"It is an interesting commentary on the market that America Movil has decided to exit so quickly after the market shifted from being a four player to what is now a three player market," Moffett said, adding that the decision "speaks volumes about the state of wireless competition."