Sprint’s owner, Softbank of Japan, is standing by its troubled US child, with founder Masayoshi Son saying that Sprint’s radical capex cuts helped boost its parent’s operating margins by 8.8% in its just-finished fiscal year.
“Cost cutting is going smoothly at Sprint,” said Son during an analyst call. “We’ll see a V-shaped recovery.”
However, his comments did not reassure some analysts. For one thing, Softbank’s operating profit may have improved, but it missed analyst expectations, and the Japanese firm did not offer guidance for the current fiscal year, saying there were too many uncertainties.
For another, Sprint is still heavily dependent on loans from its parent and elsewhere to continue its 4G build-out and its densification program, which is nevertheless likely to be constrained by its deep capex reductions of up to one-third this year – even with Sprint’s promises to adopt a very efficient and flexible approach to site costs, with a heavy focus on small cells.
Sprint has secured $11bn in “total committed liquidity”, mainly via Softbank’s creation of financing vehicles involving Sprint’s network assets and leased handsets, plus a new $2bn bridge loan from Mizuho Bank. Sprint owes $10bn that will come due by the end of 2020 and must make $2.3bn in debt payments this year, while a sluggish junk bond market will make it harder for the carrier to refinance its debt during 2016.
So analysts are still asking difficult questions. Walter Piecyk of BTIG Research flagged up the capex reduction – Sprint now says it will spend about $3bn this year, whereas Wall Street had expected $4.5bn. Sprint had previously issued a capex guidance of $15bn over three years. Piecyk wrote in a client note: “We think Sprint’s aggressive cut to capital investment and continuing lack of evidence on any activity to improve its network raise red flags about the company’s strategy. This low level of capital investment was last seen in 2008/2009 during the financial crisis.”
He added: “While it’s true that small cell investment is largely expensed rather than capitalized, we have observed virtually no evidence of Sprint’s network activity over the past year. Tower company SBA noted that Sprint canceled plans to place 2.5 GHz radios on existing towers.” And the seasoned Sprint watcher has his doubts about Sprint CEO Marcelo Claure’s claim that the bulk of the major network investments were over with the completion of Sprint’s Network Vision network modernization program – itself the subject of many delays and uncertainties. That has now been succeeded by the Next Generation Network program, which is designed to focus on densifying the macro network which was built out under Vision, and on adopting cost effective approaches to sites and backhaul
But Piecyk said the claimed improvements to the network were not showing through in user experience – which would be serious for a carrier which has been dogged by poor network quality and subsequent churn for years, and which has only just started to reverse the flight of its subscribers.
Piecyk wrote: “We have been using a Sprint phone and an AT&T phone for the past few months and find Sprint to be both less reliable and slower than AT&T – and not by the small amount often reflected in the Root Metric scores wireless operators like to tweet about.”
And he is concerned about the bureaucracy that can slow the acquisition of sites for small cells, and Sprint’s reliance on wireless infrastructure partner Mobilitie for its densification roll-out. “As far as we can tell, Sprint’s network strategy is reliant on one company, Mobilitie,” Piecyk continued. “Yet, we continue to hear reports about Mobilitie’s failed attempts (under various aliases) to use rights of ways to locate small cells. We are therefore not surprised that Claure is still talking about zoning and permitting for small cells. This may have worked in Japan (or even for Google in its early deployments of Google Fiber), but we are skeptical that Mobilitie can execute in the United States.”
Mobilitie CEO Gary Jabara disagreed with this assessment and said small cells were “a massive migration away from traditional vendors, traditional technologies, traditional solutions. It’s so much more reasonably priced from a capex experience.”
Reports say Sprint/Softbank will pay $16bn for most of Deutsche Telekom's stake in TMo, but long review process lies ahead
The major owners of the two operators - Sprint's parent Softbank of Japan and T-Mobile's Deutsche Telekom - have reached a "basic agreement" to merge, according to Japan's Nikkei. Its unidentified sources said Softbank would buy more than 50% of T-Mobile's shares, mainly from DT, which still owns 67% of TMo even after it merged with MetroPCS. That would leave DT with about 15%, though it has been widely expected to seek a complete exit soon, and would value TMo at about $32bn.
The Japanese firm, which believes the merger is the only way to create a viable competitor to Verizon and AT&T, would pay cash and use stock swaps to reach the estimated price of over $16bn, and is said to have lined up credit from eight financial institutions, including Japan's top three banks plus JPMorganChase and Deutsche Bank.
More difficult than the financing will be the regulatory process. The companies, particularly Softbank's CEO Masayoshi Son, have been lobbying the FCC and Department of Justice for months, preparing the ground for the inevitable scrutiny of any deal which would reduce the number of mobile carriers in the US still further.
Softbank will be well aware that AT&T's own bid for T-Mobile distracted the carrier for about a year of reviews, before finally failing. However, it argues that the US needs a more powerful third player as a counterweight to the rising power of the big two, and that the competitive landscape must be seen in terms of all mobile, telecoms and media services, not mobile alone. This will be relevant as the regulatory authorities are also examining proposed mergers between AT&T and DirecTV, and between the two leading cablecos, Comcast and Time Warner Cable. Verizon last week denied interest in Dish, which itself wants a partner to launch itself as a mobile operator, and which is opposing all the mega-mergers.
In June, Son told a journalists that he had seen "new movement" in his preliminary talks with regulators, implying that they were softening their approach, but he will not be deluding himself that this will be an easy process. It is already reported that he has had to ask banks to commit financing for a longer time than usual, which will incur higher fees, because of the expected length of the approval process. Sprint is asking its own banks for about $20bn, while Softbank is seeking a similar amount, Bloomberg said. The funds would also be used to refinance some of TMo's debt, purchase spectrum at upcoming auctions, and fund operations.
Despite the risks of a long regulatory process and a new competitive landscape, US's third and fourth cellcos set to table merger plan
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.