News that the Sprint/T-Mobile merger talks are back on again was met with skepticism and wariness from speakers on the first day of the Wireless West Conference, yesterday, in Los Angeles. The story, originally reported by the Wall Street Journal, caused Sprint’s stocks to go up 20 percent and T-Mobile’s to rise 7 percent, while CCI fell $5.22, AMT fell $5.04 and SBAC fell $8.51. On a percentage basis, all three fell about 5 percent.
The latest talks between the two carriers fell through last November but attempts for a merger span back to 2014. Bob Paige, senior VP, mergers and acquisitions, Vertical Bridge, didn’t think anything would come from the renewed talks after previous failures.
“Different day, same stuff,” Paige said. “The last time it broke down because of control issues for Sprint. I’m not sure what has changed this time. Maybe Sprint has realized how difficult and costly it is to deploy a network, and it has brought them back to the table.”
Clayton Funk, managing director, MVP Capital, was also skeptical. “What has changed from five months ago?” he said.
Panelists agreed that even if Sprint and T-Mobile can strike a deal, it is far from a foregone conclusion that the Department of Justice would sign off on the deal.
When the merger was called off and Sprint pledged to renew building out its system, tower owners were excited at the prospects of having four carriers concurrently building out.
Whether the Sprint/T-Mobile merger is successful or not, the fact that the merger talks have begun again may throw a wrench into one of the key catalysts for growth in the tower industry, the panel agreed.
“We had believed that all four carriers were going to become active, now, my fear is that two of them will shut down,” said Tony Peduto, CEO, CTI Towers. Paige agreed, saying that the carriers would probably slow down with their leasing plans and tower builds as they go through this process.
The vast majority of the inquiries for leasing that Tarpon Towers received in the first quarter were from Sprint.
“Yesterday’s announcement muddies the waters. The next month will be very interesting,” said Ron Bizick, CEO, Tarpon Towers. “We will see if we don’t have Sprint shoving the pig through the python and they put a hold on it. They could keep going, slow roll it or it could come to a screeching halt.”
Analysts Not Shocked by Talks but also Not Overly Optimistic
Craig Moffett, MoffettNathanson, was not surprised by the merger announcement. In a report on T-Mobile, which dropped on April 10, the same day as the WSJ article, he said any deal that returns $40 billion shouldn’t be counted out. But he also didn’t think it was highly probable.
In an email, he gave four reasons that could be affecting the timing of the renewed talks for a union. The election cycle was one, with the 2020 presidential primaries a year and a half away and a merger taking roughly one year to get approved. The second was the FCC’s spectrum auction for 24 GHz and 28 GHz spectrum scheduled for November and the accompanying “quiet period” that might preclude merger negotiations. Third, Sprint’s renewed buildout only wastes money if the two eventually get together. Lastly, Moffett doesn’t be Sprint can make it on its own.
“There is the simple reality that Sprint doesn’t appear to have a path to sustainability on its own,” he wrote. “With a significant step-up in their network capex (of an incremental $1.5B to $2.5B YoY) beginning in F2018, it is hard to see Sprint coming close to free cash flow breakeven – much less cash flow positive – in the foreseeable future.”
Matthew Niknam, Deutsch Bank Research noted that if control and price were hurdles in 2017, the firm could not see how those factors had changed five months later.
“While scenarios discussed in late 2017 indicated DT/TMUS would be the controlling parties in the merged entity, recent stock performance would dictate that dynamic has diverged even further,” Niknam wrote. “For context, the relative ratio between TMUS/S shares had recently widened to 12:1 (prior to recent reports), versus an 8:1 ratio widely discussed in press reports this past summer. As such, the better operating performance and a brighter market outlook for standalone TMUS (relative to standalone Sprint) would now dictate (in theory) that the former (and DT) may warrant an even bigger controlling stake in a merger entity.”
And there were those reports that Masa Son did not want to lose control of Sprint…