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Sprint in Talks with T-Mobile for a Possible Combination
Posted by: Live investor (IP Logged)
Date: December 16, 2013 01:15PM

The U.S. wireless industry is again back with merger news. Late on Friday Wall Street Journal reported that the economy’s third largest wireless operator Sprint (S), which recently completed its deal with the Japanese telecom operator Softbank, is now eyeing T-Mobile (TMUS). The third national wireless operator planning to purchase the fourth national carrier sounds pretty interesting. However, the potential Sprint-T-Mobile merger is an extremely bold step full of hurdles.

Verizon (VZ) and AT&T (T) are two dominant players in the U.S. market, creating a virtual duopoly. Both Sprint and T-Mobile are way behind the two biggies, but recently the two smaller players have taken steps to revitalize and pose challenge to the big two. Softbank acquired an ownership stake in Sprint while T-Mobile purchased regional pay-as-you-go player MetroPCS. These are some major strategic moves that the smaller two national carriers took in order to compete effectively with Verizon and AT&T. Now Sprint plans to gulp T-Mobile.

The Kansas carrier is stuck with a regulatory issue with respect to the T-Mobile merger. The transaction is expected to be valued at $20 billion. So what are the concerns that the proposed merger brings?

Regulators – A Roadblock

Presently the U.S. wireless industry has four major national carriers, namely Verizon, AT&T, Sprint and T-Mobile. But if the third-largest and the fourth-largest carriers consolidate, then there would be three major telecom players instead of four. The Federal Communications Commission, or the FCC, and other regulators are not very encouraging when it comes to the combination between two big players. The primary reason is that consolidation of big entities would create more of a monopolistic or duopolistic environment and kill competition.

In 2011 December, the Department of Justice and Federal Communications Commission shot down the AT&T and T-Mobile merger proposal in fear that it would create a duopoly and crush competition. However, Sprint argues that the Sprint-T-Mobile combination would create a much smaller player compared to AT&T T-Mobile.

But would a Sprint T-Mobile combination really be of any use to consumers? That remains doubtful. There are several other hurdles in connection with potential merger.

The Main Difficulties

First of all, Sprint and T-Mobile run on different networks. The wireless technologies of the two mobile operators are very different and it would give no immediate advantage. The Kansas carrier has CDMA network while T-Mobile runs on GSM. This raises the question of network compatibility. The third-largest carrier recently got rid of the Nextel network which was incompatible with its CDMA. I am sure Sprint wouldn’t want history to repeat itself. It would take a massive amount of capital and time to consolidate Sprint’s and T-Mobile’s network and make them functional.

Second, both Sprint and T-Mobile have a base of prepaid customers which are the least lucrative ones. The consolidated entity would have approximately 53 million prepaid subscribers, which is again way behind Verizon’s 95 million and AT&T’s 72 million customers.

Finally, both Sprint and T-Mobile recently completed their deals with Softbank and MetroPCS. The regulators wouldn’t like so many players to get involved with each other and combine.

My Takeaway

The merger proposition might be looking very interesting, but I believe it is better for both Sprint and T-Mobile to stay independent rather than combine with each other. The deal is unlikely to turn fruitful given the regulatory and technological hurdles and other constraints. And in case the deal matures, it would be interesting to see how the new combined entity works to get stronger to compete with the larger two players.

Stocks Discussed: S, TMUS, VZ, T,
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