Sorry Traders, T-Mobile’s Sprint Deal Is Anybody’s Guess
(Bloomberg Opinion) -- It’s almost Valentine’s Day, so naturally, top of mind for me are the star-crossed lovers of the U.S. wireless industry. With romance in the air, it’s only appropriate that T-Mobile US Inc. and Sprint Corp. will appear side by side on Wednesday morning to defend their union to a panel of lawmakers questioning its effects. Depending on the mood in the room, the hearing may raise the specter of government forces standing in the way of this merger, just as they have in the past.
T-Mobile CEO John Legere and Sprint Executive Chairman Marcelo Claure are back on Capitol Hill to testify before the House subcommittee on communications and technology about the pending merger of the nation’s third- and fourth-largest wireless carriers. The gregarious and straight-talking Legere smoothly handled a mild Senate grilling last June, but much has changed since then, not least that Democrats took control of the House in the latest midterm elections. On Tuesday, nine Democratic senators — including 2020 presidential candidates Elizabeth Warren and Amy Klobuchar and others considering running — called for the deal to be stopped on the grounds that it will hurt consumers.
While Congress isn’t the ultimate decider, a public hearing this late in the process means the panel should be better equipped to challenge the executives, providing more fodder for opponents of the deal and state attorneys general conducting their own probes. Approval mainly hinges on the Department of Justice, though, as the Republican-led Federal Communications Commission is unlikely to block the merger if the DOJ doesn’t.
Investors got worried after T-Mobile, seemingly out of nowhere, said point blank last week that it will make the same or better rate plans available to customers for three years after the deal closes. You have to wonder if Legere is desperately capitulating to pressure from regulators behind the scenes. Trading activity in shares of T-Mobile and Sprint now implies a low probability of 30 percent that the deal gets done. I checked with analysts on their odds — they were all over the place:
This administration and political atmosphere make it especially difficult to predict merger outcomes. There are also the unique circumstances surrounding T-Mobile and Sprint. A deal would reduce the number of national wireless carriers to three and give the combined company a huge lead in the prepaid market that serves lower-income customers. But without a deal, Sprint’s business very well may fail.
As Sprint, which is controlled by Japan’s SoftBank Group Corp., tries to reassure shareholders and creditors, it’s also shown the government just how dire its situation has become. The latter is an attempt to earn sympathy from regulators, but it’s also a better reflection of reality. Analysts for New Street Research have written that Sprint is “barely on track to generate enough Ebitda to cover network investment and interest expense.” They peg 2019 Ebitda at $8.23 billion, and Sprint sees capital expenses for its network hitting at least $5 billion. It paid $2.5 billion in interest expense during the last 12 months while burning through $2.8 billion of cash. Without the merger, T-Mobile goes back to being Sprint’s biggest rival, and that’s a scary thought for Sprint.
The companies are trying to focus attention on the opportunity to build a nationwide 5G network that can compete with Verizon’s and AT&T’s, an ambition that would support President Donald Trump’s nationalistic campaign messaging. On Tuesday, Legere also sought to assuage concerns about the ties between T-Mobile’s German parent company and China’s Huawei Technologies Inc. by pledging to “never” use Huawei equipment in the T-Mobile US network.
Legere and his team did misstep by repeatedly staying at the Trump International Hotel in Washington as they sought merger approval. Whether or not effective, it leaves a bad taste in people’s mouths. That said, if key states for Trump’s base forcefully come out against the deal, the president won’t care that T-Mobile executives were frequent hotel patrons.
Another complicating factor is that two of the deal’s most vocal opponents have ulterior motives. Dish Network Corp. is sitting on billions of dollars of spectrum licenses for which the list of potential suitors has shrunk to mainly just Verizon. Without Sprint’s spectrum, T-Mobile could look at Dish’s. And Peter Adderton, a founder of Sprint’s Boost Mobile who made the media rounds criticizing the merger, said he’d buy back the Boost business if regulators forced a divestiture.
Heading into Wednesday’s hearing, Legere is saying all the right things and trying to shift the optics back in his favor. If he’s to be taken at his word, the deal may not be harmful. But at the end of the day, regulatory decisions aren’t made on nice-sounding words from a likable CEO.
Another hearing with the House subcommittee on antitrust that was scheduled for Thursday morning was canceled and hasn't yet been rescheduled.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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