Sprint May Be Making a Play for T-Mobile
My take is that the deal would win regulatory approval, but it's not the right move for Sprint.
In the ongoing tumult that is the wireless carrier market, the Wall Street Journal is reporting that number 3 wireless provider Sprint may be considering a bid to acquire number 4 provider T-Mobile USA. You will recall that Sprint sold 70% of itself to Softbank for $20 billion last year and immediately turned around and announced it was acquiring the 49+% of Clearwire it didn't own for $2.2 billion. T-Mobile was the target of a $39 billion acquisition by AT&T in 2011, but the deal was squashed when both the Department of Justice and the FCC lined up against it. T-Mobile walked away with the equivalent of $6 to $7 billion in breakup fees that it has been putting towards increasing its spectrum holdings.
Even if the Sprint/T-Mobile deal were to go through, the combined company would still be number three in the US market with a total of 52 million post-paid customers, compared with 72 million for AT&T and 95 million for Verizon Wireless.
In the meantime, we've got three prime time players involved. Softbank's CEO Masayoshi Son made a major name for himself with his successful takeover of Vodafone's Japanese operation in 2006, and after buying the majority stake in Sprint, elected to leave his longtime associate Dan Hesse at the helm. Son had first met Hesse in the early 2000s when he made an investment in optical company Terabeam, where Hesse was CEO.
T-Mobile CEO John Legere, former CEO at Global Crossing and chief executive at AT&T Asia, is also no slouch. He has been pushing the envelope since joining T-Mobile in September 2012. With his "un-carrier" strategy he has cut prices, done away with two-year contracts, and slashed international roaming rates--all while wearing a signature pink t-shirt.
The two big questions that come out of this potential deal are: 1) Will it happen? and 2) What happens if it does? The AT&T move to acquire T-Mobile met with opposition virtually from day one. Apparently only AT&T could see the combination of the number 2 and the number 4 carriers to be a positive move for consumers. The fact that they bet a cool $6 to $7 billion on a positive outcome was either major chutzpah or just plain stupid.
However, from the Department of Justice standpoint, the combination of number 3 and number 4 shouldn't have that same stink. Sprint and T-Mobile have consistently offered better pricing (including unlimited data plans from Sprint) and have separated themselves from AT&T and Verizon with more aggressive use of technologies ranging from Sprint's tri-band (800 MHz, 1900 MHz, and 2500 MHz) LTE Spark service (promising data rates in the 50 Mbps to 60 Mbps range), to T-Mobile's Wi-Fi/cellular Unlicensed Mobile Access (UMA) service.
The other variable in the outcome is the FCC, now under new chairman Tom Wheeler, and we have yet to get a clear read on which way he might lean. About the only significant issue to come before the commission thus far in his tenure is the proposal to allow in-flight cellular usage, and the FCC has made the preliminary and non-committal move to seek public comment. We do know that the 67-year old chairman has a close relationship with President Obama, and served on a special FCC committee created by former commission chairman Julius Genachowski, to advise the president on technology. His primary agenda item is expected to be freeing up additional radio spectrum, but it is unclear how that priority would relate to a Sprint/T-Mobile combination.
Technically, integrating the two networks would be a major undertaking. Sprint's core network uses CDMA technology, while T-Mobile is GSM. Having beat its head against the wall for years trying to integrate the Nextel operations (which it finally shut down), Sprint should be leery about taking on yet another major integration initiative. That job would come on top of its ongoing Network Vision initiative to upgrade its radio access network and integrate Clearwire's 2500 MHz frequencies with its own. The companies can paint a picture of an evolving network moving inexorably to LTE, but the near-term reality will be a lot uglier than that.
Also, we have two very different CEOs in the flamboyant Mr. Legere and Sprint's mild and mellow Dan Hesse. Given Sprint's role as the proposed "acquirer" and Hesse's long-term association with Softbank's Masayoshi Son, we can only expect that he would get the top spot at the combined company. That's the "obvious" bet, however Legere's style might be more in sync with Son's aggressive approach to business.
So if nothing else, it appears that the wireless industry should get off to a rollicking start in 2014. My take is that the deal would win regulatory approval, but it's not the right move for Sprint. The company already has enough on its plate, and would be reaching too far to take on another challenge of this magnitude. However, Masayoshi Son is known for this kind of bold move, and despite the fact that Softbank's stock took a 3.1% drop Monday on concerns it's overleveraged, he is the guy who's driving the bus.