After years of dancing around the issues, it looks as if Sprint and T-Mobile are close to a deal. While the value reported was around the $31 billion mark, what makes this most interesting is that the companies feel they need to get bigger in order to survive the new landscape taking shape under net neutrality rules.
Bloomberg had these details in a story by Alex Sherman:
Sprint Corp. (S) is nearing an agreement on the price, capital structure and termination fee of an acquisition for T-Mobile US Inc. (TMUS) that could value the wireless carrier at almost $40 a share, people with knowledge of the matter said.
Sprint will offer about 50 percent stock and 50 percent cash for T-Mobile, leaving Bonn-based parent Deutsche Telekom AG with about a 15 percent stake in the combined company, according to the people, who asked not to be identified because the process is private. The agreement could be announced as soon as July, the people said. At about $40 a share, T-Mobile’s equity value would be about $31 billion.
A deal would bring together the third- and fourth-largest U.S. wireless carriers to create a more formidable competitor to leaders AT&T Inc. and Verizon Communications Inc. Billionaire Masayoshi Son, the founder of Japan-based SoftBank Corp. (9984), which owns 80 percent of Sprint, has been pitching the deal to skeptical regulators as beneficial to consumers in both wireless and Internet service.
Ryan Knutson wrote for The Wall Street Journal that the deal would need approval from regulators, but might be necessary for their survival:
A deal would need the approval of the Federal Communications Commission and the Justice Department. Sprint will be making a big bet that it can win. Under the terms discussed, Sprint would pay T-Mobile more than $1 billion in cash and other assets if deal is rejected, the people said.
The gamble is a risky one for Sprint, which is already heavily indebted and has posted losses for the past seven years. But executives believe recent developments at the FCC—including a contentious debate over so-called net neutrality and new spectrum-auction rules that aren’t as friendly to smaller carriers like Sprint and T-Mobile—have created an opening to move quickly.
Both companies feel doing a deal now is critical for their long-term survival, people familiar with the matter have said. AT&T and Verizon control most of the industry’s valuable wireless customers and profits. And while T-Mobile has had a good competitive run in the past year, reversing subscriber losses and taking customers from rivals, executives at both companies have said the best way to create meaningful competition over the long term would be to join forces.
Sprint Chairman Masayoshi Son has been driving the merger, pledging to be a fierce competitor. The sides began working toward a deal with a renewed sense of urgency last month after the FCC voted to approve rules for a key auction of airwaves currently held by broadcasters, expected to take place in 2015. The companies both felt revisions the agency made to the auction rules would help their case for a merger, according to several people familiar with the matter.
The New York Times story by David Gelles and Michael J. de la Merced chronicled the rise of their competitors through mergers and subscriber growth:
Sprint and T-Mobile have decided to press ahead now because their two main rivals, Verizon and AT&T, each with more than 100 million subscribers, continue to grow more formidable.
Verizon’s balance sheet is stronger, after agreeing to take full control of Verizon Wireless last year in a $130 billion deal with Vodafone. Verizon is the largest wireless operator in the country and also provides landlines, cable television and business services.
AT&T, the second-largest wireless provider, recently agreed to acquire DirecTV in a $49 billion deal, which would give it control of the country’s largest satellite television operator.
Meanwhile, the cable industry is also consolidating. Comcast and Time Warner Cable have agreed on a $45.2 billion deal that would create by far the largest cable television operator. The combined company would also have strong landline, Internet and business services offerings.
Together, these mergers and acquisitions by competitors of Sprint and T-Mobile have created a landscape that has increasingly marginalized the two smaller companies, which each have about 50 million subscribers and only provide wireless service.
The Kansas City Star story by Mark Davis said that analysts are mixed on the deal:
The pressure on T-Mobile comes from No. 2 wireless carrier AT&T Inc., according to analyst Adam Ilkowitz at Nomura. In a note to clients, Ilkowitz said an update from the big carrier shows fewer subscribers have been switching to other carriers since the end of March.
It’s a sign, said Ilkowitz, that T-Mobile’s successful campaign for new customers may be weakening.
AT&T has been a favorite target of upstart T-Mobile’s push to lure customers to its network, in part because the companies use similar network technology. Ilkowitz said he expects No. 1 Verizon also is seeing fewer customer departures, which the industry calls churn.
This news, Ilkowitz said, “underlines the rationale” for a Sprint and T-Mobile deal. Overland Park-based Sprint has argued that the two companies, if allowed to merge, would become a larger and stronger rival to the two big carriers.
But Davis also reported, there might be reason for the two companies to hold off as they await a government spectrum auction.
Carriers have said the 600 megahertz spectrum in the upcoming auction is particularly attractive because it carries signals deeper into buildings and further before the signals need to be reinforced by another cell tower.
Here’s where the idea of a merger between Sprint and T-Mobile may have hit a new snag, according to analyst Jennifer Fritzsche at Wells Fargo Securities.
Fritzsche pointed to rules that the Federal Communications Commission set for the spectrum auction. One rule sets aside part of the valued 600 megahertz spectrum and excludes the two biggest carriers from bidding. It essentially means Sprint and T-Mobile would be the top contenders for that reserved spectrum.
So on one hand, they might have to merge in order to compete, but getting bigger could put Sprint and T-Mobile at a disadvantage in bidding for attractive broadband spectrum. But as the firms hash out the details to present to shareholders, it looks like the boards and executive teams have decided that their only survival is by going ahead together.
