Sprint T-Mobile Merger Takeaways
(Bloomberg Gadfly) -- I almost can’t believe it. After years of flirtation and false starts—not to mention false hope for investors—wireless carriers T-Mobile US Inc. and Sprint Corp. have finally inked a deal.
T-Mobile agreed on Sunday to buy Overland Park, Kansas-based Sprint in a stock swap that values Sprint at about $26 billion, plus the assumption of its scary $32 billion net debt load. The transaction will give the No. 3 and No. 4 U.S. wireless carriers a much-needed leg up in a cutthroat marketplace still dominated by Verizon Communications Inc. and AT&T Inc. And it comes at a time when AT&T is trying to get even bigger by reaching outside its wheelhouse to acquire media giant Time Warner Inc., a deal that, if approved, would likely inspire Verizon to pursue its own cross-industry megamerger. For these reasons and more, T-Mobile and Sprint need one other.
Here are the three most important takeaways from T-Mobile and Sprint’s announcement:
A deal could dramatically improve profits. Between overhead redundancies, overlapping store locations and duplicative cell towers, the companies are estimating more than $6 billion in annual cost savings. This would be meaningful for their bottom line. Sprint’s business has been overburdened by debt and seemingly incapable of sustaining profitability as the weakest player. Its Ebitda figures are even worse than they appear because it doesn’t expense handsets the way its rivals do, as I explained here earlier this month. For T-Mobile, the financial benefits of a merger will help keep investors happy as its own impressive growth record naturally begins to slow some. Of course, this all assumes that the integration is seamless, which is usually the wrong assumption for big mergers. But it’s hard to imagine the two being any better off on their own.
This would solve Sprint’s unfixable problem. No matter how much money Masayoshi Son, the Japanese billionaire that controls Sprint, was willing to throw at the business, Sprint would never be able to climb out from the financial doldrums as long as its brand was the industry punchline. Even though the company got Verizon’s “Can you hear me now” ad guy to switch sides, the Sprint service is generally considered not that great—whether that reputation is deserving or not. T-Mobile CEO John Legere, who is going to run the combined company, has proven himself to be a branding master, having taken T-Mobile from the bottom of the pack to unseating Sprint as the industry No. 3 and leaving all his competitors’ stock prices in the dust. From the sound of the merger press release, the Sprint brand may go away. The company, to be called T-Mobile, “will determine brand strategy after the transaction closes,” it read.
It’s only an announcement. T-Mobile and Sprint still need to secure government approvals before they can merge, and we know that in the past regulators have taken issue with reducing the market from four to three major carriers. The current administration has been unpredictable when it comes to deciding which mergers pass muster. That said, there’s room for debate about consolidation and the degree to one type of combination would be more detrimental to consumers than another. Which is worse: A) allowing a weak wireless business to combine with its next-biggest competitor in an industry that’s lost much of its pricing power, and as cable heavyweights Comcast Corp. and Charter Communications Inc. add mobile services, or B) giving the green light to AT&T for a deal that will confer a significant amount of power over the pay-TV market through the ownership of Time Warner’s premier entertainment content? T-Mobile and Sprint, despite being direct competitors, may actually stand a better shot at obtaining regulatory clearance than AT&T and Time Warner, which don’t compete with one another.
That’s all to say, it’s been a long road getting to this point, but we’re still a long way from a done deal. Getting there will be good for both businesses. Should the deal collapse again, though, T-Mobile shareholders can at least take comfort in knowing that its growth prospects remain better than peers and for that reason, T-Mobile will always be in play for acquirers wanting a toehold in the wireless space. Sprint, on the other hand, doesn’t have much of a fallback plan. Let’s hope this is the last and final time we have to ruminate on the what ifs of a T-Mobile-Sprint tie-up.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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