Sprint and T-Mobile have announced a new plan to merge the two businesses in an all stock merger that will leave Deutsche Telekom with a 42% stake to Softbank’s 27%. The combined company will maintain the T-Mobile brand and serve a base of 127 million subscribers, nearing the country’s top two mobile operators, Verizon and AT&T.
The last merger talks between the two companies ended only in November 2017, with Sprint quickly following their collapse by striking a deal with cable company Altice USA that would allow both to offer each other’s services. After earlier talks had stumbled as Softbank’s Masayoshi Son was unwilling to accept the valuation for Sprint, that deal was reported to have collapsed over an unwillingness for Son to relinquish control of the combined company in a market that he saw as immensely valuable.
The latest deal assigns an enterprise value for Sprint of US$59 billion (US$26 billion accounting for debt), with the combined company valued at US$146 billion (US$82 billion after debts). With a four year lock-up period on their shares, T-Mobile will own 41.7% of the combined business, Softbank will own a 27.4% stake and there will remain a public float of 30.9%. Results will be consolidated under Deutsche Telekom which will nominate nine directors, including two independent directors and the current CEO John Legere who will retain that position in the emergent T-Mobile. SoftBank will nominate four directors of which 2 will be independent and the remaining two positions will likely be taken by Masayoshi Son and Sprint’s current CEO Marcelo Claure.T-Mobile / Sprint expect to achieve run rate cost synergies of US$6 billion through the consolidation while opening up opportunities for enhanced investment in the next generation 5G network.
Regulatory issues are possible
While the expectation is for the deal to close before the second half of 2019, the lack of a breakup fee as a result of regulatory blocks is indicative of the significant possibility that the deal will face regulatory headwinds. In lieu of such a fee Sprint will however be able to tap into a roaming agreement that would continue after any termination of the agreement. A previous attempt at merging in 2014 was abandoned in the face of regulatory opposition. While a Republican administration is usually viewed as conducive to passing mergers, the telecoms industry has faced some resistance to ongoing, large, vertically integrative mergers that would usually attract less scrutiny than a horizontal consolidation deal as this.
5G investments seen as critical advantage
With an eye on this environment, documentation released by the companies touted the benefits of the deal – in particular the benefits to the network and 5G investment. A combined T-Mobile and Sprint would be able to leverage a range of frequencies. T-Mobile has assets in the lower 600MHz bands that are effective at providing wide area and in-building coverage, and also has significant mmWave spectrum which is intended to deliver the dense high-speed 5G networks over relatively short ranges which it aims to set aside for 5G. Sprint also has a major spectrum holding at 2.5GHz that it has touted for 5G use which would round out the combined 5G spectrum portfolio to deliver what they describe as a ‘broad and deep network’. Together with a stronger financial position and a wider user and income base, those spectrum holdings would be leveraged with expedited nationwide deployment of 5G with an investment of US$40 billion over three years. T-Mobile assert that would pressure competitors – AT&T and Verizon - to improve their own 5G network plans with concomitant benefits to the United States of such an investment in infrastructure.
A key argument put forward by T-Mobile is that the 5G network will improve access to true broadband, citing that 51% of Americans do not have access to more than one (fixed) broadband operator. That indicates T-Mobile’s intentions to leverage the 5G network as a direct competitor for last-mile fixed line networks. The lack of broadband competition is particularly the case in rural areas. Testing in 2017 by Rootmetrics, an IHS Markit company, found that even without additional investment the combined networks’ domestic roaming percentage would reduce from roughly 27% to 16% in rural parts of the country, considering devices that support combined network coverage will be available. Neither of the two networks make any meaningful domestic roaming in the Top-125 Metro areas which RootMetrics tests extensively.
Convergence muddies the competitive environment
T-Mobile/Sprint also push the message that passing the deal would not reduce the effective number of significant operators to three, pointing out that the market is increasingly a converged one. Cable operators such as Comcast, Charter and Altice are using MVNO agreements to enter the wireless market and offer integrated converged products, making for ‘7 or 8 big competitors’.
Despite the touted benefits and the total size of the company remaining below that of both Verizon and AT&T, the deal is likely to face significant regulatory scrutiny. AT&T’s acquisition of Time Warner languishes in regulatory uncertainty, with the ongoing Justice Department court case reaching closing arguments today. That is a vertically integrative deal which would usually face less scrutiny from ant-trust regulations. However in a converging market where content is being used as a tool to gain subscribers and issues relating to the separation of content from access are also raised, it has become a more political issue.
A market consolidation is usually more contentious. The EU has subscribed (with evidence) to the position that three mobile operators does not make for a competitive wireless market. As a result the EU has blocked attempts to consolidate markets below this level with deals between Telenor / TeliaSonera in Sweden and O2 / Three in the UK being blocked. The impact of consolidation to three players on competition has to some extent developed as an accepted position which may have influenced the rejection of the 2014 attempt at a merger. Sprint and T-Mobile are therefore playing different perspective and inviting the authorities to view the deal in the broader perspective of a converging market where the boundaries have blurred and the deal could actually work to increase competition in what is currently an adjacent and uncompetitive market – fixed line broadband.
Mergers that won through but failed or failed but won
T-Mobile has bloomed since the failure of a merger with AT&T in 2011 handed T-Mobile a breakup fee of US$4 billion. T-Mobile used the funds to invest in the network, improving coverage, deploying LTE (in 2013) and cutting prices – especially for data. T-Mobile also began an effective marketing campaign positioning as the ‘Uncarrier’ against AT&T and Verizon’s more restrictive offerings.
Sprint, acquired by Softbank in 2013 has largely failed to emerge from the losses that resulted in large part from concurrently operating a range of different network technologies –iDEN, CDMA, WiMAX and LTE. These were largely the result of successful mergers, most notably the Nextel acquisition. While network upgrades under the ‘Network Vision’ plan cut the costs of supporting multiple technologies, this multiplicity impacted on the customer experience and remained confusing to customers. Reputational damage was enhanced by customer service issues which included giving agents erroneous targets and reorganisations aiming to cut costs and reflect the falling subscriber base. While Sprint has seemingly turned somethng of a corner and gained subscribers in the last two years, service revenues have continued to decline as prices were cut, falling 6.1% y/y. That has however been moderated by rising equipment revenues. EBITDA and operating income have also finally shown growth over the last year as cost cutting played through.
A deal with T-Mobile – which operates a more technologically cohesive GSM/UMTS/LTE network - would see network consolidation, with expedited closure of the Sprint CDMA network likely. Sprint note that some 20 million of its subscribers can use their current handsets on the T-Mobile network. They will be relatively painless to move over to the T-Mobile network but as in most mergers the merging company will be likely to see higher churn as it transitions subscribers to new handsets. After experiencing rapid growth since 2013, T-Mobile may run the danger of losing momentum as it grapples with such a significant merger and network consolidation while strong personalities meet in the boardroom.