The Sprint (NYSE:S)/T-Mobile merger saga continues to see interesting twists, with intense speculation holding sway over market sentiment for both stocks. In the latest development, Deutsche Telekom CEO Timotheus Hoettges is rumored to have told directors on Wednesday that the sale of their 67% stake in T-Mobile is unlikely in the near term.  This came only a day after reports that Softbank’s CEO Masayoshi Son is planning to launch a PR campaign to convince U.S. regulators about the long-term benefits of having a stronger third competitor in the wireless market. Having invested a substantial amount in Sprint, Son is looking to consolidate the U.S. market by buying out T-Mobile, which should give it enough scale and resources to compete more effectively with Verizon (NYSE:VZ) and AT&T (NYSE:T). Deutsche Telekom, for its part, is looking to exit the U.S. market but is wary of regulatory roadblocks, which stopped a previous takeover attempt of T-Mobile by AT&T in 2011.
Merger Of Disparate Networks
- How Did U.S. Wireless Stocks React To Brexit?
- Explaining The Recent Sprint Rally
- How Leveraged Are U.S. Wireless Carriers?
- Why Do U.S. Consumers Pay Significantly More For Wireless Services?
- Why Is T-Mobile’s Valuation Per Subscriber Ahead Of Sprint’s?
- What Has Driven Sprint’s Recent Margin Expansion?
While regulatory issues seem to have hogged the limelight with investors responding positively to any rumor that increased the likelihood of a merger, it seems that many of the risks associated with a potential merger are being discounted. Depending on the stake that Sprint wants to acquire in T-Mobile, the deal could cost more than $20 billion and add to Sprint’s ever-burgeoning debt load. It would also require a complicated merger of different network bands and technologies, made all the more risky by the fact that Sprint is currently undertaking an expensive network modernization drive of its own that includes the integration of Clearwire’s spectrum.
Sprint currently provides CDMA/FDD-LTE services on 800 MHz and 1900 MHz spectrum, and is building out a faster TD-LTE network using the recently acquired 2.5 GHz spectrum from Clearwire. Meanwhile, T-Mobile is using the 1700 MHz AWS band for LTE and 1900 MHz for GSM/HSPA+ services. It is also migrating MetroPCS subscribers from CDMA to its HSPA+ and FDD-LTE networks. The only frequency band that the two carriers have in common is 1900MHz, on which one is running CDMA/FDD-LTE and the other a GSM/HSPA+ network. Acquiring T-Mobile will require Sprint to perform the complicated task of shutting down one of these networks while transitioning subscribers to the other. For the combined LTE network, Sprint will have a tough time deciding what to do with T-Mobile’s AWS band given that it is already investing a lot of resources into building out its 800MHz/1900MHz/2.5GHz LTE network. Carrier aggregation could be the answer but securing handsets that can access all the different bands could be a tough task.
Sprint Preparing For Potential Dish Entry
The deal makes sense when taking a long-term view of the wireless industry, as carriers increasingly move to an all-LTE data network. But the path is fraught with operating risks and complications related to merging disparate networks, which could create a near-term opening for Verizon and AT&T to gain market share at the combined entity’s expense. Given that T-Mobile has been successful in shaking up the wireless industry in recent quarters with its aggressive ‘Uncarrier’ initiatives such as no-contract postpaid plans and quicker phone upgrades, regulators will be wary of such a possibility. In the last three quarters, T-Mobile has managed to add about 2.2 million postpaid subscribers, a sharp reversal from the postpaid loss of about 1.6 million subscribers incurred in the prior-year period.
Despite all the regulatory and operational risks associated with the deal, a possible motivation for Sprint to go ahead with a T-Mobile merger could be the emergence of Dish as a potential long-term competitor at the national level. Dish has been aggressively posturing itself as a potential wireless industry entrant, recently winning the bidding for 10 MHz of H-block spectrum for $1.56 billion. This adds to the 40MHz S-band wireless spectrum that Dish acquired from TerreStar Networks and DBSD North America last year. With Dish’s spectrum assets growing, Sprint may be looking to thwart any attempt by Dish to acquire T-Mobile down the road and become a stronger fourth rival.Notes:
- Deutsche Telekom Said to See T-Mobile Sale as Less Likely, Bloomberg, March 6th, 2014 [↩]