Editor’s Corner—Here are the 6 reasons why T-Mobile and Sprint are in merger discussions again

Mike Dano

So, first, let’s all take a deep breath. Yes, T-Mobile and Sprint are reportedly in merger negotiations again. Yes, this is the third time they’ve conducted major merger negotiations. Yes, we’ve been talking about this possible merger since 2013… oh man.

Anyway, once you get past all that, there are legitimate reasons for T-Mobile and Sprint to be holding merger discussions againand there are a variety of factors that are both pushing the companies to get the deal done sooner than later.

But, not surprisingly, there are also a wide range of factorssome old, some newthat are conspiring against a Sprint/T-Mobile transaction. I’ll go over those later, and I’ll also cover some of the ramificationsagain, some old and some newthat a merged Sprint and T-Mobile would have on the industry.

First, though, here are the six reasons why Sprint and T-Mobile are reportedly holding serious merger discussions for the third time in five years:

1, Synergy (meaning, money). “Most recent management commentary suggests a ~$37bn NPV of synergies, and as such, we assume synergies ramping to a $4bn run rate in year 3,” wrote the analysts at Jefferies in a research note. “We believe the combined company would have to increase the rate of spending given under-investment at Sprint, and assume a 15% capital intensity in the mid-term. Given these assumptions, we anticipate meaningful accretion, with FCF/share nearly 30% higher in year 3.”

Basically, the main driving force behind a merger of Sprint and T-Mobile, as with most mergers, is that the combined company could save a bunch of money while leveraging its larger size to compete with AT&T and Verizon.

2, Sprint’s network buildout. After merger discussion between T-Mobile and Sprint collapsed late last year, Sprint’s SoftBank committed to investing up to $6 billion this year improving Sprint’s network (work that involves deploying 5G via Sprint’s 2.5 GHz holdings, as well as connecting more of Sprint’s towers to fiber).

However, that work could well reduce the synergies available in a T-Mobile and Sprint merger because it would make it harder for the companies to combine their respective wireless networks if Sprint makes progress on its own, independent network improvements.

As noted by Craig Moffett of MoffettNathanson, Sprint’s buildout work “will require that Sprint amend and extend existing tower leases, deploy new equipment, and enter into entirely new leases for both towers and backhaul (e.g., their recent agreement with Zayo for fiber-to-the-tower to new macro sites). At best, much of this capital spending would be wasted should they merge with T-Mobile. At worst, these new leases would meaningfully reduce the net synergies from a merger.”

Added the analysts from Wells Fargo: “The more S invests in the network now the lower that synergy opportunity becomes.”

3, This year’s spectrum auctions. As Moffett also points out, the FCC is moving forward with plans to auction 28 GHz and 24 GHz spectrum later this year, thus paving the way for either Sprint or T-Mobile to fortify their 5G plans with the kind of millimeter wave spectrum that AT&T and Verizon have already shown interest in.

“As was the case with the broadcast incentive auction in 2016, this auction will carry an obligatory ‘quiet period’ that would likely preclude merger negotiations even if only one of the two companies wanted to participate,” Moffett wrote. “Taken with the election calendar, above, that means it’s now or, well… never.”

4, Politics. Although President Trump’s Department of Justice is moving against AT&T’s attempt to purchase Time Warner, Moffett wrote that a “the odds of merger approval under a Democratic administration would almost certainly be worse.” He pointed out that the 2020 primaries are just a year and a half away, which could be driving renewed interest in a Sprint/T-Mobile tie-up before those arrive.

Others, though, argued that the current political climate is actually acting against such a transaction. “In reality, we have seen a regulatory environment riddled with DoJ opposition and deal concessions,” wrote the analysts at Jefferies. “While the trial of AT&T-Time Warner continues, the message seems clear that the DoJ is willing to oppose deals that few thought would face significant regulatory obstacles. In our view, a horizontal merger between TMobile and Sprint poses more significant hurdles than T-TWX does. Potential remedies could include meaningful spectrum divestitures and perhaps favorable MVNO terms to support competition from Cable or other potential entrants, among others.”

5, Competition may be heating up. “Last time the deal fell apart, it was because neither Softbank (Masa) nor DT were willing to give up control at the terms that were being discussed. Since then, the threat from the US cable players has become more imminent,” wrote the analysts at New Street Research.

Indeed, a new forecast from New Street predicts Comcast could well gain up to 2 million customers a year through its Xfinity Mobile MVNO.

6, 5G is looming. A merged Sprint and T-Mobile would have a much clearer 5G story to tell. As noted by the New Street analysts, the combined company would command 30% of the wireless industry’s revenues from fully 50% of the wireless industry’s available spectrum. That position would likely help a combined Sprint and T-Mobile create a 5G offering at least comparable with what AT&T and Verizon would offer.

That said, any merger between Sprint and T-Mobile would take at least a year to approve, and any merged network would take time to build out, so the combined carrier certainly wouldn’t have a head start on the space.

Now, those are some of the reasons why T-Mobile and Sprint may be rekindling merger negotiations now. But there are certainly factors leaning against the transaction.

Reasons against the transaction

Perhaps the most pressing factor is whether the transaction would be approved by regulators – and no one knows for sure how that might play out. “The AT&T/Time Warner suit by the DOJ might simply support a view that the administration is unpredictable in what issues they will or won’t pursue,” wrote BTIG analyst Walter Piecyk. “Winning a suit against Sprint and T-Mobile would likely be far easier for the government, if it chose that route, which is a real risk. The failure of Broadcom to purchase Qualcomm also showed that meeting with the President and promising jobs does not ensure support for deals.”

Further, any merger between Sprint and T-Mobile would likely include job cutspotentially a tough pill for the Trump administration to swallow.

But, as noted by Moffett, the biggest factor working against the deal comes down to moneyspecifically the ratio between the two companies’ shares, and whether Sprint owner SoftBank or T-Mobile owner Deutsche Telekom would accept a second-place position in a merged entity. “It remains our understanding that Deutsche Telekom remains committed to controlling (and consolidating) T-Mobile and/or its successor company post-merger,” Moffett wrote. “Unless SoftBank is willing to concede that they will not only have to accept ceding control to Deutsche Telekom, but also very likely accept an even less favorable exchange ratio than the one they reportedly rejected last year, we could be right back to a standoff.”

Reports indicated negotiations between Sprint and T-Mobile ultimately failed late last year because SoftBank’s Masayoshi Son wanted more control over the combined company. This time around, it remains to be seen whether SoftBank’s Son or DT’s Timotheus Höttges will blink.

What a merger would mean for everyone else

Finally, a Sprint and T-Mobile merger would have serious consequences for the rest of the wireless industry. And analysts generally agreed that the match-up would stand as a positive for AT&T and Verizon by essentially removing a competitor from the market. “This would be a significant positive catalyst for both AT&T and Verizon’s valuation,” wrote the analysts at Scotiabank. “We estimate potential upside of over 50% to the current VZ share price and over 20% upside to our current VZ target price. For AT&T, we expect over 30% upside to the current share price and over 10% upside to our current target price if the combination of TMUS/S is successful.”

And a merger could also spell trouble for tower companies by removing a possible customer. “We believe the above is a concern for the towers and stocks are reacting as such,” the analysts at Wells Fargo wrote. “While no tower company has over 8% revenue exposure of sites where both TMUS and S are tenants we note the only merger in wireless carrier space where we saw more cell site decommissioning vs. additions was TMUS/MetroPCS. While it is too early to tell, we believe it is logical for TMUS to pursue a similar strategy if it is the buyer (shut down one network and redeploy the spectrum on the other network).”

And what about Dish? “The impact for DISH depends entirely on whether Sprint and TMUS divest spectrum,” wrote the analysts at New Street Research. “If they do, then DISH loses leverage in a potential sale of spectrum to either Verizon or AT&T. If they don’t divest, then there will be even more pressure on Verizon and AT&T to acquire DISH to try and neutralize their capacity disadvantage relative to a stronger PF Sprint. The market has taken a dim view of DISH’s prospects of late, so we see mostly upside even if no spectrum is divested.”

The bottom line

For Sprint and T-Mobile, will the third time be the charm? If you’re looking for odds, I’d probably side with Moffett on this one: “And that brings us to what are ultimately the odds of… well, all of this,” he wrote. “We still think, as we did last year, that there is perhaps an 80% probability of an attempt.  With the probability of regulatory approval at 50%, the odds of deal consummation are therefore something like 40%.” – Mike | @mikeddano

Editor's Corners are opinion columns written by a member of the Fierce editorial team. They are edited for balance and accuracy.