T-Mobile and Sprint Inch Closer to Deal
That on again, off again deal to combine T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S)? Guess what, it’s on again, at least according to the usual “sources familiar with the matter” cited by Thomson Reuters in an exclusive piece yesterday. The last round of discussions finished up in November last year with the CEO of Softbank (TYO:9984, which owns 84.7% of Sprint), Masayoshi Son pulling out of the deal at the last minute over reported valuation concerns coupled with worries over not having control of the combined group, which Deutsche Telekom (ETR:DTE, 63% owner of T-Mobile) wanted. Apparently a deal could formally be announced in the next few days.
It’s a slightly complicated affair as far as corporate deals go given that it’s not a traditional buyout but more of a merger of equals with a consolidation of earnings reporting onto the books of one owner (Detusche Telekom) with another owner (Softbank) looking to trim its debt and the entities in question financing the deal themselves, at least if all goes through but the short term results are pretty clear and it seems like the market likes it. Both companies were up in after-hours trading when the story broke with Sprint up 9% and T-Mobile up 4%.
The synergies in the deal are obvious though so it’s kind of a no brainer. 5G is coming and it’s going to cost a fortune to anyone that wants to be a player in the space with numerous finance houses concerned about Sprint’s ability to compete in the market given that recent growth has come predominantly via discounting. The number 3 and 4 wireless providers in the US would do well to combine forces in the outlay, they’d also have a shared client base of over 127 million clients (globally) and would create a major alternative for Verizon (NYSE:VZ) and AT&T (NYSE:T) in the US who currently occupy the number 1 and 2 slots.
Those Horses, Hold Them Please…
Although the market likes the idea, there are still the traditional regulatory hurdles to overcome and in recent times we’ve seen several technology deals blocked for a variety of reasons ranging from national security (Qualcomm/Broadcom) to consumer detriment (AT&T/Time Warner). When discussions first became public about the possibility of a merger in 2014, then President Obama’s government had antitrust concerns over the deal which led to the first abandonment of talks of a tie up.
The Trump administration of course is the one which has also made the other recent blocks mentioned above so although the President is generally viewed as being big business friendly, where there are blatant competitive concerns such as in the AT&T/Time Warner deal, they’ll not be ignored, however it doesn’t particularly feel like that would necessarily be the case here for a few reasons.
- Verizon and AT&T combined make up approximately 69% of US market share and in recent years have both always been individually over 30% of the market.
- A combined T-Mobile and Sprint would as of Q4 2017 market share represent 29.75% of US market share, less than either AT&T or Verizon.
- Sprint would likely struggle to justify the expensive investment in 5G and other technologies on its own and without this would likely (at best) fade into a bit part player in the US wireless market or (at worst) try to proceed and potentially bankrupt itself depending on market conditions.
T-Mobile & Sprint: A Match Made in Heaven?
Given the above, US regulators would need to ask themselves a pretty serious question (if a deal actually gets agreed). Would competition be best aided by the potential failure of one of the still somewhat major wireless suppliers in the country or by the merger of it with another somewhat major supplier? An oligopoly with three sellers isn’t a disaster from a consumer protection standpoint which is effectively what we’d be looking at here and unless there are specific issues with districting and provision of wireless in the US like there are with cable providers, it seems unlikely with strong anti-collusion regulations that this would result in consumer detriment. If Sprint were to fail as a company, it’s client base would likely be predominantly split amongst the top 3 providers anyway, leading to further consolidation at the top of the market for Verizon and AT&T (as well as to a lesser extent T-Mobile of course).
I always like to point to the Boeing vs. Airbus competition for an example of just how savage competition between even a duopoly can be, this merger would still leave the US with 3 major players and some smaller providers to mop up any remainder. Assuming that US regulators continue to eyeball the market with a view to preventing collusion and do a good job, consumer detriment feels like it shouldn’t be a major concern for the deal.
T-Mobile also has the benefit of a significant user base beyond the US via a number of wholly and partially owned subsidiaries. That’s important because it means that its cost of developing and rolling out new technologies is significantly lower on the basis of a per customer cost which is an important aspect to consider when it comes to major technology investment.
Source: Reuters Exclusive