US telecommunications company Sprint (S, Financial) has agreed to acquire competitor T-Mobile (TMUS, Financial) for $32 billion, Reuters reported on June 5 citing a “person familiar with the matter”.
The merger between the third and fourth-biggest mobile operators in the US values T-Mobile’s shares at $40 each, representing a 17% premium on T-Mobile US’s closing shares on June 4.
Details of the deal are still being negotiated by Japanese firm, Softbank, which owns Sprint. Deutsche Telekom owns 67 percent of T-Mobile. The proposed merger would see Deutsche Telekom keep a 15 to 20 percent stake in the combined company.
With T-Mobile US’s 14 percent share of the market added to Sprint’s 16 percent, the merger between the two firms would create the third largest US telecommunications company, with 30 percent of the market. This would put the company marginally behind AT&T (T, Financial) and Verizon, which each hold 34 percent of the market’s share. The consolidation would mean just three companies control 98 percent of the telecommunications market. US Cellular holds the remaining two percent.
Such a deal between the firms puts Sprint and T-Mobile on a more even-footing with competitors. Sprint had 55 million customers at the end of Q1 2014 while T-Mobile US had 49 million at the same time, for a total of 104 million after the potential merger. Verizon and AT&T had 122 million and 116 million, respectively, according to research firm Strategy Analytics, so they are still a good chunk ahead in terms of market reach.
T-Mobile shaking up the industry
Despite its competitors’ greater reach, T-Mobile is rapidly gaining customers and even stealing some away by abolishing two-year contracts, roaming charges for calls and data in over 120 countries, and even paying the termination fees for customers wanting to break free from contracts with other carriers; no wonder the firm recently saw its best ever quarter for subscribers growth.
Some analysts believe the suggested pricing is low, with JP Morgan analyst Hannes Wittig stating: “T-Mobile US should be worth more than that given that the synergies should exceed $20 billion, Deutsche Telekom would share some of the execution risk and Sprint would be getting control ... Somewhere in the high 40s would be more appropriate,” according to Reuters.
Synergies between the two firms would give them better access to airwaves, increased likelihood of winning spectrum auctions – and importantly also deny competitors Verizon (VZ, Financial) and AT&T from winning auctions – synergies through shared infrastructure, and synergies in equipment ordering.
Regulatory hurdles before the deal goes through
The deal still needs to achieve regulatory approval before it can proceed. A previous deal where T-Mobile attempted to buy-out AT&T was rejected by the US Department of Justice and the Federal Communications Commission.
Three years ago, the regulators rejected that $39 billion buy-out bid, which then meant AT&T had to pay Deutsche Telekom a $6 billion reverse break-up fee. No potential break-up fee for the current deal has been revealed yet, although Bloomberg said Softbank is pushing for a $1 billion termination fee while Deutsche Telekom wants $3 billion if the deal falls through. The two companies are likely to argue a large third carrier in the market would cut wireless prices and improve infrastructure investment, benefiting customers.
Analysts said a decline in both firms’ shares on June 5 reflected the market’s worry over these regulatory hurdles, with T-Mobile and Sprint closing 2.3 percent and four percent lower, respectively.
Verizon’s stock dropped from $49.28 down to lows of $48.87 on the news, which it regained later in the day, closing the week at $49.42. AT&T did similarly with a slight drop before regaining value and closing at $35.02.
The bottom line
As long as the regulators approve the merger, the deal will create a powerful new force in the US telecommunications market. T-Mobile is already well known for shaking up the market over the past three years, forcing AT&T and Verizon to be more flexible.
This merger takes the essence of what makes T-Mobile a competitive force and then doubles its market reach. Buy T-Mobile now for early gains prior to the merger, or wait for the security of the regulators’ approval before committing to this upwardly mobile stock.
