Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) merger talks are getting more serious. Sprint CEO Dan Hesse has been avoiding all speculative questions concerning the deal, but has been quite upfront in saying that a larger third carrier would create more competition for AT&T (NYSE:T) and Verizon (NYSE:VZ).
Rumors have been swirling the Kansas carrier could make a blockbuster offer ranging for something between $31 billion and $50 billion. In an interview with the USA Today, Hesse said that a third stronger carrier in the U.S. wireless market is a necessity to create pressure on the two largest national players. Consumers would be getting services at competitive rate and would rather benefit from the merger than lose a fourth carrier as a result of the combination.
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The U.S. telecom industry, as it is, is a duopoly of the two biggies. Both Sprint and T-Mobile do not pose threat to their position at the current moment, but the joint force together would definitely make a greater impact on them.
According to a Reuters report eight banks have agreed to help finance Sprint deal for T-Mobile. These banks include Deutsche Bank, JP Morgan, Bank of America, Meryll Lynch, Goldman Sachs, and CitiGroup. Sprint has also approached Japanese banks for this purpose. A source close to the matter told Reuters that if things move in favor of Sprint, the deal terms could be finalized with the banks and the merger terms could be declared in August.
The Federal Communications Commission (FCC) and the Department of Justice (DoJ) are reluctant about this deal as it would reduce the number of carriers from four to three. There are several industry analysts who share a similar thought as the regulators. They believe that reduction of the number of carriers could rather drive prices up, than push it down.
In contrast Hesses believes that a third stronger competitive would put price pressure on AT&T and Verizon, forcing them to consider lower price rates for their plans and offerings. But history goes against what Sprint is vouching regarding lower prices, says a MoffettNathanson Research analyst. In his words – “history teaches that three-player markets don't tend to have lower prices than four-player markets.”
But Sprint believes that competition from the joint entity would trigger the two biggies to come out with innovative thinking and present competitive plans and products. Hinting at the joint entity (Sprint and T-Mobile), Sprint could increase penetration and construct wireless infrastructure in rural areas, which otherwise receive the expensive service of the big two.
Sprint Desperate to Have T-Mobile
T-Mobile has performed spectacularly well in the several quarters – thanks to the brilliant improvement in its subscriber base. It gave AT&T a tough run and successfully poached millions of its customers by giving reasonable and attractive plans. It is quite possible for the fourth largest national player to continue as a standalone entity. But Sprint may not be able to do so. It needs the assistance of T-Mobile to continue its business profitably. The Kansas carrier’s desperation is pretty obvious.
AT&T had made a proposal to acquire T-Mobile in 2011, but the latter could conclude the deal as it fell through due to antitrust issues. But this was a sought of blessing in disguise for T-Mobile as it received a massive breakup fee of $6 billion from AT&T. This amount was utilized for huge marketing campaigns that greatly benefitted the smallest national carrier, and is highly responsible for where it is today. So a merger with T-Mobile would bring huge relief to Sprint.
The Crux of the Tale
The bottom-line of all this is that the FCC is the pillar of the deal. In case it rejects support, the entire acquisition plan will fall through. In case the deal gets a green signal from the regulators, Sprint should be able to comfortably finance the deal. But in such a scenario investors need to keep a close watch on the debt loaded balance sheet of Sprint.