Sprint and T-Mobile Have a $27 Billion Problem to Solve

(Bloomberg Businessweek) -- When T-Mobile US Inc. and Sprint Corp. announced on April 29 their $26.5 billion plan to merge, they argued that the combined entity could create a more formidable rival to the biggest wireless providers: Verizon Communications Inc. and AT&T Inc. Indeed, the merged pair would be able to pool their research and development spending and wireless spectrum rights to more quickly offer customers 5G service, the next generation of superhigh-speed wireless communications. Trouble is, few seem to believe this marriage of convenience will bear fruit.

The day after the announcement, shares of Sprint—the target of the all-stock offer—suffered their worst drop in a year, falling 14 percent. T-Mobile stock also got hammered, declining 6.2 percent, as investors feared regulators would nix the deal.

Investors have reason to be skeptical. Almost four years ago, a previous attempt to unite Sprint and T-Mobile was rejected by the U.S. Department of Justice and the Federal Communications Commission. At the time, both agencies said that competition could be harmed if the number of national carriers shrank from four to three.

But Sprint and T-Mobile say the industry landscape has changed since then. With cable companies Comcast Corp. and Charter Communications Inc. pushing into wireless—primarily by leasing space on the networks of larger rivals such as Verizon rather than building their own—the mobile service market has gotten more competitive, they say. And with countries including South Korea and China racing to gain a foothold in 5G, the betrothed telecommunications companies are already suggesting that the U.S. should do everything in its power to encourage the development of stronger wireless carriers in America. (Sprint is controlled by Japan’s SoftBank Group Corp. and T-Mobile is owned by Germany’s Deutsche Telekom AG, but those are just details.)

“We are going to drag the rest of the players kicking and screaming to the prize, which is American leadership” in fifth-generation wireless networks, says T-Mobile Chief Executive Officer John Legere.

Flag waving will only go so far, however. Expect plenty of heated arguments in the coming months over whether the looming deal would make the industry more or less competitive. Or whether consumers will be adversely affected.

Kevin Roe of Roe Equity Research LLC notes that in four-player markets in other countries, the smaller companies cut prices to gain customers. But, he says, “that dynamic goes away” with mergers among the top wireless carriers. In Germany, Telefonica Deutschland Holding AG in 2014 won approval to acquire the country’s No. 4 wireless carrier, Royal KPN NV’s E-Plus service. The elimination of E-Plus, which had been a leader on price cutting, reduced the field to three top players. “Three-player mobile markets with fairly equal market share are better able to maximize revenue and profit through price increases,” Roe says. That would have a negative impact on consumers.

Sprint and T-Mobile’s ability to challenge such thinking could determine whether their future together is a long and lucrative one, or whether their love is simply star-crossed. 

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net

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