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T-Mobile to Buy Sprint in $26 Billion Deal

[fa icon="calendar"] Apr 30, 2018 3:03:13 PM / by Michelle Seiler Tucker

Michelle Seiler Tucker

T-Mobile US Inc. has approached Sprint Corp. with a $26 billion deal, which, if approved by the Justice Department, would wind down the US wireless market from four to three national companies. The new combined entity is to be owned by T-Mobile parent company Deutsche Telekom AG (42%) and Sprint parent company SoftBank Group (27%)—the remaining 31% to be owned by the public. The combined company would be called T-Mobile, and T-Mobile’s CEO John Legere would run the company. Both Masayoshi Son—CEO of SoftBank—and Tim Hoettges—CEO of Deutsche Telekom—are determined to close the deal. 9.75 Sprint shares will be exchanged for one T-Mobile share. Both Sprint (S) and T-Mobile (TMUS) are down sharply in Monday intraday trading as worries loom about government interference and regulation. The plausibility of the deal is sound whereas the feasibility is skeptical.

This marks the third time in the last four years where the two rivals have attempted the combination. Masayoshi Son of SoftBank acquired Sprint for $22 billion in 2013 with plans to merge with T-Mobile. Further plans were conflicted by regulatory challenges from the Obama administration, as well as disputes of majority control going unsettled. Since the initial approach by Sprint under Mr. Son, Sprint’s market value has shrunk almost to half of T-Mobile’s, but both companies’ futures will diminish if they were to move forward alone. With new technology, stiff competition from AT&T and Verizon, and an aging cellphone sector, Sprint and T-Mobile need each other for survival. In 2017, Verizon Communications Inc. reported about 116 million wireless customers in the US and AT&T Inc. around 93 million. Compared to their rivals, T-Mobile had roughly 59 million, and Sprint had 41 million. The combined network will immediately put T-Mobile in the same class as Verizon and AT&T. With each other’s resources, the companies could decommission about 35,000 cellular transmission cites, cutting down rent and maintenance, as well as overall costs from the rival competition—both companies were focused on middle market income customers. Furthermore, the companies pledged Sunday to invest up to $40 billion on the network with strong focus on 5G services, and they are projecting total savings of $6 billion per year. Unfortunately, the companies could face regulatory challenges from the Justice Department. The Justice Department just recently interfered and sued AT&T Inc. in November for its $85 billion takeover for Time Warner Inc. This type of blockage from government is likely as this would mean there will only be three national wireless companies and as there is no breakup fee attached to the proposed deal structure. The companies could make the argument that 5G services overlap into other industries such as cable companies and technology firms. If that is the case, the wireless companies could be up against several new competitors. Additionally, Sprint and T-Mobile would add roughly 80,000 full-time positions if and once the deal closes. Until then, beware of the Department of Justice.

The combination of Sprint and T-Mobile raises a couple questions. Will cell phone bills increase? How would the company culture change? When companies merge and when there is so few competitors, firms will gain some pricing power. You typically see this in a monopolistic environment since the company is the sole provider of a good or service. Government ensures that that is not the case, but the wireless cellphone market is still an oligopoly—a market of limited competition (i.e., airline companies). Therefore, it may be difficult for these providers to ensure lower costs, but this could mean otherwise with roll-outs of unlimited services becoming more standard. With unlimited services becoming a norm, it will be hard to distinguish these companies, so these companies may need to resort to alternative strategies more like T-Mobile’s. Secondly, Sprint and T-Mobile were known for seeking out middle income, budget-constrained customers. T-Mobile has a reputation of being a rebel and scrappy while Sprint is more reserved. With John Legere leading the new company, he will be inclined to stick with his current management style, but this will be pressured with other stakeholders such as SoftBank. The new competitive level will also pressure him to evolve the company culture to align more like AT&T and Verizon. However, having a strong base for budget-constrained customers and targeting higher income customers could be a strong advantage in differentiating itself from AT&T and Verizon—who do not have such a strong base on lower income customers. Nonetheless, the effects of the combined companies and the industry will be transparent when and if the deal closes. For businesses considering acquisitions, it is important to assess the necessity and the capacity of such a strategic decision. Does your company have the capital structure to undergo an acquisition? What synergies will be formed after the transaction? These are all necessary questions to ask in mergers and acquisitions.

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