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T-Mobile and Sprint formally announce their engagement

TMUS Sprint merger

The love affair between T-Mobile US and Sprint will be taken to a new level as the pair finally agree terms on a $26 billion merger.

A combined business would have 120 million subscriptions, in comparison to the 144 million and 160 million at AT&T and Verizon respectively, the ability to invest at scale and more efficiently, as well as a catalogue of spectrum readying the organization for a 5G assault. T-Mobile US has been making waves as it chases down the AT&T and Verizon lead in the wireless market, though this merger would add momentum to the crusade.

The $26 billion all-stock deal, which will be viewed with a great deal of scepticism by regulators, will see John Legere become CEO of the combined company, known as T-Mobile, and Mike Sievert, current COO of T-Mobile, serving as President and COO. Tim Höttges, current T-Mobile US Chairman of the Board, will serve as Chairman of the Board for the new company, while Masayoshi Son, SoftBank CEO, and Marcelo Claure, Sprint CEO, will also serve on the board. T-Mobile has certainly gained the upper-hand when it comes to management.

“This combination will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation, and a second-to-none network experience – and do it all so much faster than either company could on its own,” said Legere. “As industry lines blur and we enter the 5G era, consumers and businesses need a company with the disruptive culture and capabilities to force positive change on their behalf.”

The creation of a new, combined company promises faster rollout of 5G, increased competition, expansion into rural communities and to fuel US ambitions to dominate the next era of the digital economy. There are plenty of claims, some of which will certainly be nothing more than PR quips, but should it clear regulators the communications environment in the US will be a new beast.

The end of telco’s longest running soap opera

This announcement ends a will they/won’t they storyline which has been going on for years. Rumours of the pair finally getting together were becoming as common as rain in London, so those who dismissed last week’s reports should be forgiven.

2014 was the beginning of the saga, but at this point it was Sprint looking to acquire T-Mobile US. Deutsche Telekom had been mulling over an exit from the US market, where the brand was lagging light-years behind the AT&T and Verizon leaders. How things have changed.

Talks resumed mid-way through last year, only to collapse in September. At the time a deal was supposedly very close, only for Sprint to back out as the pair couldn’t agree on what ownership of the combined business would look like. T-Mobile reinvigorated talks in November, though this episode was certainly a short-lived one.

Surprising Son gives up easier than we thought

When the two companies were sat around the negotiating table last year, discussions fell apart as there was no agreement over who would have the controlling voice in the boardroom. As reports emerged last week, claiming a deal would be finalised in the coming days, we were sceptical. There are a lot of egos sitting around this table.

Softbank CEO Masayoshi Son, who controls 84.7% of Sprint, is not a man who likes to sit in the backseat. Neither are the top-guns over at T-Mobile US. To move this deal forward, it does seem Son has conceded his position, allowing executives at T-Mobile US to have the biggest offices in the combined organization.

We are not surprised this conclusion was reached, but we surprised at the speed. Son might be an influential and powerful businessman in the telco space, but in this relationship T-Mobile/Deutsche Telekom had the better hand. T-Mobile US has more subscribers than Sprint, momentum and future prospects are better with the magenta army, while Deutsche Telekom will hold a greater share of the newly formed company. There should be little surprise T-Mobile executives are the bosses.

Regulators might have a thing or two to say

Before anyone gets too exciting about the tie-up, it is worth bearing mind US regulators might have a couple of comments. Both the FCC and the US Department of Justice will have to greenlight the deal. AT&T’s attempted acquisition of T-Mobile in 2011 was called off after opposition from regulators, as were initial discussions between T-Mobile and Sprint in 2014.

“The main issue with this deal will be regulatory and if US competition authorities are prepared to allow the market to consolidate from four to three national operators,” said Gabriel Brown, Principle Analyst at Heavy Reading.

“Consolidation is probably good for operators, with a small risk they become complacent through lack of competition, but the calculation for consumers is harder to make. Affordable mobile connectivity is important to the wider online economy, and prices are generally driven lower, or at least kept in check, by competition. On the other hand, profitable operators are more able to invest in new technology and new networks, and therefore offer better services – the combined entity would be better placed to invest and compete in 5G, for example.

“Certainly there are technical and execution risks to the proposed integration, and valuation questions, but this is fundamentally about competition policy. It is a gamble on the regulatory environment in the US. To pursue this deal and then have it fall apart later will be negative for both T-Mobile and Sprint.”

Targeting troublesome Trump’s trump cards?

One common theme throughout the below video from Legere and Claure was indirectly addressing President Donald Trump. While the Commander-in-Chief has not passed comment on the deal just yet, he has shown himself to be proactive when it comes to major M&A.

Legere and Claure have seemingly tried to combat this offensive before it has any chance to gain momentum. The plan seems to be to align the merger with Trump’s interests and objectives.

Firstly, the pair spoke extensively about supporting rural communities throughout the US, many of whom are underserved by the status quo. Offering increased competition and better service to these communities, many of which are located in Trump-supporting states, would certainly gain favour in the White House.

Secondly, investment. This is a promise which has been loud and proud during the Trump administration, with promises to deliver new opportunities and jobs to the US people. Claure spoke of $40 billion investment over the coming years in delivering 5G connectivity, as well as the creation of thousands of jobs. Mergers guarantee redundancies, though the promise here is aggressive expansion plans through combined assets will create a bigger workforce possible than if the two organizations remained separate.

The promise of new jobs, in call centres for example or in new stores to fuel the rural expansion, might also address some of the concerns from regulators. In most mergers, jobs are reduced as there is natural overlap. Job creation is certainly a bold promise, though if the claims can be backed up, it might go some way to smoothing the approval path.

The final area is China. The Trump administration has been highly combative when it comes to addressing the Chinese threat to the US economy on the whole, and Silicon Valley’s strangle hold on the global technology industry. The message here is simple; only a combined T-Mobile/Sprint can deliver the 5G foundations necessarily for the US to retain its lofty position at the top of the global economy.

Beating China to the 5G punch

“Only the new T-Mobile will have the network and spectrum capacity to quickly create a broad and deep 5G network in the first few years of the 5G innovation cycle, the years that will determine if Americans lead or follow in the 5G digital economy,” said Legere. “Listen, only T-Mobile and Sprint can do this together.”

US dominance in the technology and business world can be pinned to a number of different factors, though Legere and Claure believe the country’s early actions in the 4G world was a major contributing factor maintaining this position. For the US to continue at the top, taking a leadership position during the early days of 5G is crucial.

The newly formed company will have access to the 2.5 GHz spectrum currently owned by Sprint, as well as T-Mobile’s 600 MHz hording and other assets. This combination is what the team believe is the best opportunity to scale and deliver 5G nationwide in the shortest period of time. Legere claims the mmWave spectrum at AT&T and Verizon is wholly unacceptable for 5G (due to its short range), estimating the total cost of delivering nationwide connectivity at $1.5 trillion. If these figures are anywhere near accurate, AT&T and Verizon might well struggle to keep up.

Compared to T-Mobile’s network today, the combined company’s network is claimed to be able to deliver 15x faster speeds on average nationwide by 2024, with speeds up to 100x faster than early 4G. The message here is relatively simple; no company standing alone can create a nationwide 5G network. T-Mobile and Sprint are justifying the acquisition by claiming nationwide 5G is impossible without the tie-up.

Expect a race to the bottom to start

T-Mobile has been offering lower tariffs and all-you-can-eat data plans for some time, while Sprint has been aggressively targeting new customers with lower prices in recent months. We would expect these trends to continue, with the acquisition fuelling a race to the bottom.

Customers will be happy with challenge to the status quo, though this could strain the spreadsheets at AT&T and Verizon. A more coherent convergence strategy is likely to be on the agenda before too long, perhaps the next Uncarrier offer, while the press release promises more ‘affordable’ connectivity solutions. Consumers will reap the benefits first and foremost, though government wireless contracts are in the sights as well.

In the video, Legere highlights Verizon and AT&T will have 4x the number of contracts with government and local authorities than the newly formed organisation. This is clearly one of the areas the team anticipate growth.

Will this improve prospects for Sprint customers?

While T-Mobile US customers are pretty happy on the whole, the same cannot be said for Sprint’s. Numerous customers have been quite vocal about the poor performance of the network, as well as sub-standard customer service, and while there have been improvements from the telco over recent months, some might be happy about the positive influence of T-Mobile.

As you can see from the tweets below, some customers hate Sprint, some are confused and some are excited by the prospect of the acquisition.

This is perhaps one of the reasons the T-Mobile brand will be maintained under the new business, and why T-Mobile executives are getting the best offices; it is the better performing of the two right now. Maybe this is just what the Sprint business needs; a break from the past, draw a line and move on.  

 

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