Weekend reports that Sprint was looking at acquiring T-Mobile US stirred the pot, though most observers found the taste not quite to their liking.
Following a report from The Wall Street Journal that Softbank Chief Executive Masayoshi Son was spearheading plans for Sprint to acquire Deutsche Telekom’s controlling interest in T-Mobile US, a number of commentators noted that while such a deal might makes sense from a business point of view – at least for Sprint – the current regulatory environment would preclude such a union in the short term.
“In our view, while such a transaction makes sense from a scale perspective, based on our conversations with our [Washington, D.C.] contacts, this deal is by no means a sure thing,” explained Wells Fargo senior analyst Jennifer Fritzsche in a research note. “In fact, we would not be surprised if this story was purposely leaked to begin to evaluate the pulse from regulators around such a possibility.”
Jeffrey Silva, senior policy director for telecommunications, media and technology at Medley Global Advisors, echoed those comments, citing potential issues at both the Federal Communications Commission and Department of Justice.
“At present we’re not convinced new leadership at both agencies, Tom Wheeler as chairman of the FCC and William Baer as chief of the DoJ’s antitrust division, necessarily changes the dynamics that a Sprint/T-Mobile merger could give rise to at the moment,” Silva noted in a research note, pointing to recent decisions by the DoJ and FCC to scuttle AT&T’s $39 billion acquisition of T-Mobile USA in 2011 on competitive grounds and spectrum aggregation worries.
“Both Sprint and T-Mobile have improved their positions by degrees through a variety of transactions in recent years, and each will have the opportunity to acquire additional spectrum via upcoming auctions and/or other transactions while keeping the four-carrier national market intact,” Silva added. “Verizon 700 MHz A-Block, Dish S-Band and LightSquared L-Band spectrum remains in play. T-Mobile has exhibited a level of feistiness in the market of late, which may serve to validate the DoJ’s and FCC’s rationale for keeping it in the mix of national wireless operators.”
Some indicated that should Sprint or T-Mobile US suffer from diminished operating returns over the next year, momentum for a potential hook up could swing back in favor of such a deal. Sprint would seem to be the one on watch for such a movement as CEO Dan Hesse recently stated that the carrier could continue to suffer operational challenges into mid-2014.
Sprint’s operational fortunes are closely tied to its ongoing Network Vision program that is seeing the carrier basically replace all of its network equipment that can handle various spectrum bands and technologies. Challenges in that program has resulted in highly publicized network issues in some markets and stymied the carrier’s rollout of LTE services. It’s more recently announced Spark program seems to be another step in the direction of further network integration with promises of blazing network speeds. However, Sprint’s recent track record with Network Vision does not provide a reassuring basis to expect the carrier to come out ahead of any expectations.
However, Softbank’s recent $21.6 billion investment for a controlling stake in Sprint would seem able to counter claims that Sprint is suffering financially, while T-Mobile US has recently managed to raise billions of dollars through a debt and stock offering.
“We believe a deal may be easier to get done if one of the two players (T-Mobile US or Sprint) were significantly operationally and financially challenged,” Fritzsche explained. “As one contact indicated to us recently, the fact that SoftBank is behind Sprint and T-Mobile US was able to access the capital markets so freely undermines the companies’ arguments that they cannot survive absent a merger.”
With so much already on Sprint’s plate combined with a checkered history of integrating divergent operations, some think such a deal could be a bigger bite than Sprint can chew.
“New Softbank money must have given Sprint execs a short memory of its Nextel debacle, its last big ‘destiny-changing’ merger,” noted Rich Karpinski, senior analyst at Yankee Group.
While Sprint is struggling, T-Mobile US continues to shine. The carrier has managed over the past several quarters to meet or exceed customer growth of its larger rivals helped by new marketing initiatives ties to its “un-carrier” message. T-Mobile US also seems to be doing a good job integrating the MetroPCS assets, something that is quite impressive considering the network technology differences between their base network offerings (GSM vs. CDMA).
Despite its strong operations, T-Mobile US has kept open the door to partnerships with its management stating it would be open to such deals should the right one come along. There have been rumors of such an arrangement with Dish Network, which failed earlier this year to get its spectrum in play through an acquisition “attempt” of Sprint and Clearwire. T-Mobile US is also looking to bolster its own spectrum holdings in the sub-1 GHz space through the FCC’s 600 MHz incentive auction planned for mid-2015.
Even if Sprint and T-Mobile US were able to garner regulatory approval, analysts still feel such a deal could be difficult to pull off from an operational stand point.
“Although a Sprint/T-Mobile combination would be a strong third in subscribers and an even stronger first in raw spectrum holdings, the challenge of consolidating vastly different legacy networks into still very different LTE endpoint networks (made up of assorted spectrum bands and delivered/supported by a collection of radio network vendors) is a major engineering challenge,” said Yankee Group’s Karpinski.
In the meantime, others note that Verizon Wireless and AT&T Mobility could benefit from the rumors as customers may become confused over just what might happen at either Sprint or T-Mobile US, causing them to look at more stable operators for their wireless needs.
“Even if the merger speculation involving T-Mobile US does not materialize, we believe the confusion among its customer base could again negatively impact its subscriber trends in a way similar to what had occurred during the attempted and failed merger with AT&T,” warned Canaccord Genuity analyst Greg Miller. “If such speculation persists, recent strong momentum in [T-Mobile US’] improving subscriber trends could fade with the flow share shifting back to the largest carriers Verizon and AT&T.”
Tower impact
Despite the dour view on such a deal, tower companies were quick to come out stating their position if such a transaction were to take place. Crown Castle noted that Sprint and T-Mobile US combined represented approximately 45% of its consolidated site rental revenues and that both carriers currently resided on about 8,000 of its sites.
“Crown Castle’s revenue from T-Mobile on these 8,000 towers represents approximately 10% of Crown Castle’s consolidated site rental revenues,” the company stated. “In addition, there is an average of approximately six years and eight years of current term remaining on all lease agreements with Sprint and T-Mobile, respectively.”
American Tower noted that Sprint and T-Mobile US combined accounted for 26% of third-quarter operating revenues pro-forma its pending acquisition of rival Global Tower Partners and sites from NII Holdings. Sprint and T-Mobile US share approximately 5,500 American Tower sites, with an average of seven years of remaining non-cancellable current lease term on those sites.
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