Timing all wrong for a Sprint-TMo merger

Despite the risks of a long regulatory process and a new competitive landscape, US's third and fourth cellcos set to table merger plan

By Caroline Gabriel

The regulatory scrutiny could distract Sprint and T-Mobile USA for a year, at a critical juncture in 4G roll-out, but the two firms are nevertheless expected to announce a merger deal within the next few weeks.

Their argument - echoed by many European would-be spouses - is that a combined third player would be in a better position to compete robustly with AT&T and Verizon. The real logic is that the competition is no longer just about mobile - the real power will lie with converged wireline/wireless/video providers, which means the major WiFi-toting cablecos, and potentially Dish, are in the frame too. Indeed, the merger of two mobile-only players is somewhat old-fashioned, since it will position the cellcos better in the increasingly price-sensitive war for megabytes and minutes, but do nothing for quad play or content offerings - in that respect, a merger of either with Dish would make more sense, and invite less regulatory scrutiny.

As European cellcos such as Telefonica, KPN and Hutchison 3 have discovered, competition agencies remain, perhaps anachronistically, focused on not reducing the number of like-for-like rivals, rather than accepting the broader definitions which quad play is bringing to communications and media. Sprint and TMo will have to argue their case on the basis of providing a stronger, better funded mobile-only operator in the US, at a time when the mobile-only business case is weakening, and their larger rivals are building up acquisitions and partnerships in converged networking and content (as seen in AT&T's bid for DirecTV).

So Softbank's ambitions to turn its majority stake in Sprint into a US powerhouse are actually less threatening to the big two than they would have been a couple of years ago, but they will attract just as much regulatory scrutiny - a process which could be harmfully distracting. Softbank CEO Masayoshi Son would do well to remember the sorry saga of AT&T's bid for T-Mobile (smaller in those days, prior to its own merger with MetroPCS). That tied up AT&T resources and put some key decisions on hold for a year, while Verizon took advantage of its rival's tied hands to make its own moves, primarily a spectrum deal with four cablecos - just as valuable in terms of network capacity, and less worrying for competition agencies.

Sprint and TMo need to be very sure that their deal will be approved to risk all this time and distraction. Sprint is already lagging behind with its hugely ambitious Network Vision and LTE program. T-Mobile has had a disruptive impact in recent months with its 'Uncarrier' series of initiatives, and would worry AT&T more by carrying on with that activity, than engaging in a merger process. So it is bad timing to engage in a complex approval pitch to regulators and shareholders - and even if the deal were green-lighted rapidly, the companies would have to face the challenges of merging their networks, customer propositions and business plans.

But corporate ambitions do not always listen to history or logic, so it seems that the two cellcos - and their respective primary shareholders, Softbank and Deutsche Telekom - will indeed put their proposal on the table, after almost a year of speculation, in July. According to Bloomberg sources, price has been a major sticking point, with DT demanding $40 a share and Softbank angling for about $37. The final price is likely to be around $39, say the sources. That would value TMo at $31.3bn, but the total cost would be about $40.8bn including debt and cash considerations. Sprint is likely to offer 50% stock and 50% cash, leaving DT with a stake of about 15% (it currently owns 67% of the enlarged TMo).

If regulators reject the plan, Sprint would have to pay TMo more than $1bn in cash and other assets, according to the reports.

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