Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) merger has been in talks for quite some time. The Kansas carrier, in particular, is quite interested for this combination as it understands that fighting Verizon (NYSE:VZ) and AT&T (NYSE:T) isn’t possible otherwise. In contrast, the regulators aren’t looking that excited about this proposal, fearing it would kill competition and shrink the number of national wireless players from four to three. However, several analysts believe that the consolidation proposal is necessary to preserve healthy competition and crush the virtual duopoly of the big two. In fact, it’s become a survival arm for Sprint and T-Mobile.
We’ve had mixed reaction regarding the potential merger. While the FCC’s doesn’t look pleased with the proposal, analysts suggest that the combination has become a necessary move. Why so?
- Warning! GuruFocus has detected 8 Warning Signs with T. Click here to check it out.
- T 15-Year Financial Data
- The intrinsic value of T
- Peter Lynch Chart of T
Reasoning It Out
Although Sprint and T-Mobile are national telecom players, they are way behind Verizon and AT&T. Neither Sprint nor T-Mobile would be able to contend with the likes of their bigger rivals in isolation. The only solution for the two is to join forces and emerge as a stronger player that would effectively compete with the Big Red and the Dallas carrier, instead of giving namesake competition.
According to a recent New Street Research report Sprint and T-Mobile would require additional finance of around $10 billion in the next 18 months to sustain in the wireless market. But neither Sprint nor T-Mobile has the required scale of operation through which they would be able to fund such a huge amount. The report states that their current revenues aren’t enough to support their pressing need.
The FCC may feel that a wireless industry should ideally have at least four players to keep the competition alive. Is that really the case? In fact “there simply isn't enough revenue in the industry for four carriers to cover their fixed costs unless there is a significant shift in market share”. This clearly suggests that the industry isn’t viable to support four or more players.
There’s another concern which suggests that Sprint and T-Mobile combination has become a necessity. The FCC has schedule the incentive auction of the highly coveted 600 MHz spectrum, the lifeblood of any wireless player. The result of the auction would decide the fate of a telecom player’s competitive strength for the next few years.
Currently Verizon and AT&T have all the funds in place to conquer the spectrum chunk. Sprint or T-Mobile is in no position to acquire the low frequency that is extremely crucial to expand and strengthen coverage, particularly in the suburbs and the rural region of America. However, the two together would have joint resources to bid for the valuable airwaves and fight with the big-pocketed Verizon and AT&T.
Good Time for Merger
We’ve seen the FCC and Department of Justice blocking the AT&T and T-Mobile $39 billion deal in the past. If Sprint and T-Mobile suffer the same fate at the hands of the regulators, it would have a terrible impact on the two carriers and the industry as well. As we say a stitch in time saves nine, it’s important to allow Sprint and T-Mobile combine at this juncture when both of them are faring decent in their businesses. If they merger now, it would lower the overall cost, improve the financial position proving the decision fruitful.
If the combination proposal is given a go-ahead signal at a later date, when one of the two or both are in a difficult state, the synergies of combination would get diluted. Competing with Verizon and AT&T would get tougher than it would have been had the merger been allowed at an earlier stage.
It’s good time for the regulators to understand that the wireless industry needs a stronger third player. It’s not going to emerge suddenly from nowhere. If one thinks rationally, clearly Sprint and T-Mobile are nowhere close to the two and wouldn’t possibly be in the future, unless they merge. So there’s no ambiguity regarding the fact the Sprint-T-Mobile merger would have positive implications on competition. What are your thoughts?