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Why Sprint’s Troubled By Rival Suitor For T-Mobile?

August 02, 2014 | About:
Quick Pen

Quick Pen

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Sprint (S) has been forming strategies to acquire fellow player T-Mobile (TMUS) from quite some time, but now there’s a twist in the tale. Long time suitor and third largest U.S. carrier Sprint saw French phone company Iliad make a rival offer to the fourth largest U.S. telecom provider. Iliad gave a complete surprise by making a cash offer of $15 billion to T-Mobile for a controlling stake in the wireless provider. Shares of T-Mobile climbed 6.5% post Iliad’s announcement, while that of Sprint plunged by a good 5.3% to $7.35.

Sprint and T-Mobile have been courting each other for the past six months, and a sudden entry of Iliad may change the game, threatening the position of the Kansas carrier.

The Proposal
A person close to the matter considers that the $15 billion cash offer for 56.6% stake, which translates to $33 a share, is not as attractive and is undoubtedly inferior to the Sprint’s offer that is still being planned. Masayoshi Son, the chairman of Softbank that owns Sprint, is heard of preparing a deal that would give $40 a share to T-Mobile.

Iliad said that it had submitted a proposal to T-Mobile’s board of directors, and the latter confirmed that it received the proposal, without commenting any further. A person requesting anonymity said that T-Mobile’s parent Deutsche Telekom that owns two-third of the company, hasn’t yet entered into any formal discussion with Iliad.

However, the rival bid has put further pressure on Son, to accelerate the process of merging Sprint and T-Mobile before the matter get more complicated and out of Sprint’s control. The American suitor needs to get quick in its action and present a solid proposal, hard to deny, before T-Mobile. A Jackdaw Research analyst said:

“With another potential bidder, they (Sprint) may not be able to wait this out. It probably forces them to act faster and could raise the price they were willing to pay”

A Big Threat
The deal between Sprint and T-Mobile has several hurdles on the way. First, the Federal Communications Commission (FCC), which has not been in favor of the combination, though the agency hasn’t done the screening of the proposal. Second, the deal structure between Sprint and T-Mobile involves certain difficulties. Sprint will not be making its proposal official before September.

And finally, Iliad’s proposal is the new obstacle. Several analysts believe that Iliad’s proposal would be preferred by the regulators over Sprint’s offer. A combination of Sprint and T-Mobile would reduce the number of national carriers from four to three in the U.S. – not something that the watch dogs would be quite comfortable with. They fear that such a structure would reduce competition, and lead to consumer exploitation.

These reasons give Iliad’s proposal an edge over Sprint. A Macquarie Securities US analyst also said that even if Iliad makes a lower offer to T-Mobile compared with Sprint’s, Iliad would get preference over the Kansas carrier because of regulatory concerns.

Departing Thoughts
T-Mobile is an essential part of Sprint’s strategy to effectively compete with the larger rivals in the long run and emerge as a stronger contender. However, Iliad’s proposal has given Sprint a big push to pursue its strategies and plans faster. What remains to be seen is how the FCC would react to Iliad’s proposal. Of late T-Mobile has become increasingly aggressive and has been a pain for larger carriers because of its hostile approach of offering reasonable plans to gain subscribers and widen its base. This would be of great aid to Sprint, particularly as it has been losing subscribers in the past. It would be interesting to see how the trio chalk out their individual strategies to make the most of the situation.

About the author:

Quick Pen
A seasonal writer with a Management Degree in Finance and interests in automotive, technology, telecommunication and aerospace sectors.

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