Mergers and Acquisitions: The Continuing Saga

As I noted in a November 2013 blog post (Is LTE the Winner? Follow the Money), the wireless carrier industry continues to be “engaged in a kind of horse race to see who would be first to offer the best, broadest, and most powerful LTE network.”

The most recent twist in the race concerns the proposed merger of T-Mobile and Sprint. As of August 6th, 2014 Sprint announced they were calling it off and long-time CEO Dan Hesse has been replaced. In the realm of LTE giants, these two companies rank well below both Verizon and AT&T with respect to numbers of subscribers. (There are other measurement criteria, which I’ll discuss in a later post.) Combined, however, the new company would have been on more equal footing—with about 100 million subscribers versus the other two companies’ 110-120 million. With less than half the subscribers of either AT&T or Verizon, Sprint and T-Mobile lag their larger competitors in LTE network build-outs and the main rationale for the merger was to gain parity with their larger competitors.

Sprint cited FCC regulatory pressure as the primary reason they backed out. Some observers thought approval was a no-brainer: Instead of having two dominant players, there would now be three, which should improve competition and benefit end users. Others suggested (and it ended up being the case) that the FCC would oppose any attempt to further consolidate the market.

If you’ve been paying attention to the industry news, you will remember that AT&T tried—and failed—to buy T-Mobile back in 2011. One of the most vocal opponents back then was Sprint. (Because AT&T’s bid failed, it had to pay T-Mobile a tidy $4 Billion in cash and spectrum assets). Unsurprisingly, AT&T has been trying to stand in the way of the T-Mobile/Sprint play. As reported in June by the National Journal, AT&T Chairman and CEO Randall Stephenson said it was a "’stretch’ to see how [the merger] would get regulators' nod of approval, because it would reduce competition in the wireless industry from four major carriers to three.”

If the Sprint/T-Mobile merger had been approved, it would make the US wireless industry a three horse race, with MVNO TracFone as the next largest provider. (MetroPCS Communications would have moved up to the number 4 position, had T-Mobile not bought it last year for both its hardware and spectrum holdings. With MetroPCS out of the picture, TracFone is now nominally #5—but it isn’t really a carrier per se. TracFone’s main line of business consists of selling pre-paid cell cards from the major providers to low-income consumers.)

Since the Sprint/T-Mobile merger was called off, T-Mobile may be looking forward to another multi-billion-dollar payday, possibly receiving a $2 Billion break-up fee from its suitor. In the meantime French Company Iliad has an outstanding big to acquire 57% of T-Mobile for $15 billion which is reportedly too low for T-Mobile to consider. There are reports that they were looking to sweeten that offer by working with Dish Network, Cox Communications, and Charter Communications before the Sprint acquisition fell through.

Sprint is still in a good cash position. Last July, Tokyo-based SoftBank Corp. paid $21.6 Billion to acquire 72 percent of Sprint shares and later increased its stake to 80 percent. Sprint has used much of this cash infusion to beef up its LTE network but they need the subscribers on those towers to ROI on their investment. To be fair, the total $6 Billion T-Mobile stands to get (from AT&T and Sprint merger break-up fees) is not just a windfall. It represents disruptions in their business resulting from these failed merger attempts.

The number of subscribers is a key indicator of market strength for cellular providers, but it isn’t the only one. In my next post, I’ll talk about spectrum holdings.