Coverage: Sprint deal with T-Mobile is in trouble

Japan’s SoftBank is on the verge of walking away from discussions to merge its U.S. wireless operator Sprint with T-Mobile, its next biggest competitor.

James Fontanella-Khan and Arash Massoudi of The Financial Times had the news:

After several months of discussions and weeks of intensive back-and-forth, the Japanese conglomerate which owns an 83 per cent of Sprint remains unhappy with the status of the negotiation with T-Mobile’s German owners Deutsche Telekom.

According to people involved in the talks, multiple issues remained a concern for SoftBank, including the level at which Sprint would be valued in any potential merger with T-Mobile.

SoftBank was also concerned about the proposed governance structure of the combined company as well as uncertainty over how competition regulators might react to a deal that would consolidate control of the US wireless market into the hands of just three dominant players.

Greg Roumeliotis and Liana B. Baker of Reuters reported that SoftBank directors don’t want to give up control of Sprint:

In a board meeting at Japan’s SoftBank on Friday, several directors expressed doubts about giving up control of Sprint in any deal, the sources said, the latest twist in on-and-off talks to unite the two U.S. wireless carriers that began earlier this summer.

According to tentative deal terms that Reuters was first to report last month, SoftBank and other Sprint shareholders would have received close to 40 percent or a little more of the combined company.

The holdup in negotiations could torpedo plans to merge Sprint and T-Mobile, controlled by Deutsche Telekom, into a single carrier with more than 130 million U.S. subscribers, behind Verizon Communications Inc and AT&T Inc.

It could also damage the dealmaking credentials of SoftBank Chief Executive Masayoshi Son, who has raised close to $100 billion for his Vision Fund to invest in technology companies, and uses his image as a reliable counterparty to clinch deals.

Brooke Sutherland of Bloomberg Gadfly wrote that SoftBank shouldn’t let talks die:

We — like investors — are scratching our heads as far as SoftBank’s strategy here. Sprint reported yet another quarterly loss last week, underlining just how badly it needs a combination with T-Mobile to help staunch its cash bonfire and unprofitable attempts to win over customers. SoftBank’s proposed alternative to the merger, per the Wall Street Journal, is to double down by making a significant investment in Sprint’s network. Let’s hope its suppliers take Monopoly money.

Since SoftBank revived its interest in a Sprint-T-Mobile deal, Sprint’s shares have underperformed. Masayoshi Son may be angling for a way to land a better exchange ratio.

This abrupt shift in the company’s stance may be an attempt to get more attractive terms, but as far as negotiating tactics go, it’s curious. This news is competing against previous reports that said SoftBank was open to ceding control in order to ensure the deal gets done. T-Mobile needs a merger, too, as Gadfly’s Tara Lachapelle has noted. But it doesn’t need one as badly as Sprint does. With a market value that’s about double Sprint’s, it’s clearly the stronger partner in these negotiations, and Deutsche Telekom has every right to demand a controlling stake.