T-Mobile And Sprint Merger Prospects: What Has Changed Since 2014?
According to a report from Bloomberg last week, Sprint has entered into informal merger talks with T-Mobile , in a move that could shake up the fiercely competitive U.S. wireless market. The talks, which are apparently in preliminary stages, come around three years after Sprint dropped its attempted 2014 merger of T-Mobile, on account of anti-trust concerns. In this article, we take a look at what has changed since the last attempted merger and what it could take for a potential deal to go through.
T-Mobile Is In A Much Stronger Position
When Sprint made its $32 billion bid for T-Mobile about three years ago, it was the larger of the two carriers. However, things have changed significantly since then. T-Mobile has captured almost all of the net growth in the lucrative U.S. postpaid wireless phone market over the last three years – with its postpaid base up from around 22 million in early 2014 to about 32 million currently – and the company now has a market cap of about $55 billion. Sprint, on the other hand, remains heavily indebted, with net debt standing at over $31 billion, and it has had to resort to improving liquidity by mortgaging some core assets and slashing costs. The company has had limited success in bolstering its subscriber base, despite offering the most competitively priced plans in the industry. Sprint’s market cap stands at about $30 billion. Sprint’s parent firm Softbank also may have its hands tied to an extent, after it made some big ticket deals earlier this year. Given these circumstances, it seems unlikely that Sprint will have the financial wherewithal to buy out T-Mobile. Considering T-Mobile’s high valuation and the bargaining leverage it would have in a negotiation, there is a possibility that the merger could take a different form this time around, and there have been reports that SoftBank might give up control of Sprint while choosing to retain a minority stake in T-Mobile. That said, it’s still unclear if T-Mobile would want to be the acquirer in a potential deal, given Sprint’s recent issues.
Regulatory Environment May Have Softened, But Approval Won’t Be Easy
There is a sense that the regulatory environment for a merger may have softened. The FCC and the Antitrust division of the Justice Department, which were responsible for scuttling the proposed 2014 merger, could examine the combination differently under the new administration. For instance, at the FCC, Chairman Ajit Pai appears to have moved away from his predecessor Tom Wheeler’s view that the U.S. should have four national wireless carriers. While the new nominee to lead the Justice Department’s Antitrust division has not made any statements on a potential deal, he would replace Obama-era officials who were strong opponents of the combination. That said, a merger could still face intense regulatory scrutiny, as the combined entity could be the second-largest U.S. wireless player after Verizon, holding the largest spectrum hoard in the industry. Moreover, the recent competition between T-Mobile, Sprint and the larger two carriers has actually been very healthy for the U.S. wireless market, fostering a lot of innovation while helping to keep pricing in check. This could give the deal an appearance of being anti-consumer, resulting in regulatory hurdles.
The Cable Option May Remain Open
While we believe that a combination between the two carriers would be accretive for both companies, given the significant scope for cost cutting, there is a possibility that both carriers could explore other options as well. For instance, cable and pay TV companies such as Comcast and Charter have been increasingly interested in entering the wireless market, as they look to hedge their businesses in the wireless era, while mitigating the impact of cord-cutting. While cost synergies may be limited in such a scenario, regulatory issues could potentially be less complex and shareholders could also expect a more sizable, upfront premium for their stock.
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