As the wireless infrastructure awaits the decision of the U.S. Department of Justice on the Sprint/T-Mobile merger, analysts are taking a hard look at the deal. While there are questions about whether the DoJ will approve the $26.5 billion merger that was proposed in April, some question whether the merger should move forward based on basic business principles.
It is hard to find any analysis that says Sprint can survive, let alone thrive, without the merger. But other analysts, such as MoffettNathanson, question whether T-Mobile might even be better off without combining with Sprint.
The Investor Angle
Sprint’s second quarter results were a mixed bag. Service revenue, ARPU, post-paid phone net adds were better. Churn was down. But EBITDA fell during the period and it remained free cash flow negative (-$278M).
“On balance, [the Q2] results, particularly when taken with the more moderate pricing posture adopted in early July, make a better case for sustainability than for the merger,” wrote Craig Moffett, senior analyst. “Still, that is not to say that Sprint looks genuinely sustainable.”
The joining of the two companies may not make sense because of a lack of synergies, Moffett said. Even with $4B in synergies, the combined Sprint/T-Mobile EBITDA may be no larger than it would be for the two companies on a standalone basis, he wrote.
“Six billion dollars of synergies were seemingly gone in a flash, lost to the need to ‘fix’ Sprint’s inflated pricing [average prices paid by existing customers are higher than T-Mobile’s],” Moffett wrote. “[Affidavits by the carrier] made clear that Sprint (and its network) were in a more dire position than previously disclosed.”
So from a T-Mobile investor standpoint, it might not be a good deal.
Federal Merger Review
The New York Post caused a stir Aug. 6 with a story that said the U.S. DoJ believes three carriers are enough to keep competition alive in wireless. That assertion has since been challenged. But it does bring up the wild card of merger approval.
Coincidently, also on Aug. 6, Ad Age reported that T-Mobile planned to drop its T-Mobile Essential price to $60, which matched Sprint’s unlimited plan and undercut Verizon by $15.
“T-Mobile is out to convince U.S regulators that the mobile-phone market will remain competitive even if it’s allowed to acquire Sprint,” according to Ad Age. “Consumer groups fear that prices will go up if the two smaller, more aggressive competitors are allowed to combine.”
Research performed by Luigi Zingales, professor at the University of Chicago Booth School of Business and Mara Faccio of Purdue University showed that mobile phone service in Europe are markedly lower than in America. Even accounting for U.S. handset subsidies, Americans paid $65 billion more a year than German mobile users in 2015, according to an editorial penned by Zingales in the New York Times.
“We estimate that consumers in the United States are paying producers around $50 billion more a year than their European counterparts. More important, there is precious little evidence of benefits, in terms of investment and innovation, to justify this ‘tax.’” Zingales wrote. “Is there something wrong with American antitrust? Perhaps there is a reason Americans are paying so much more for smartphones in the United States than Europeans are.”
So, from a consumer standpoint: possibly a bad deal.
Merger Makes Sense for Towers
The wireless industry needs the merger to go through to keep capex numbers up, according Keith Pennachio, executive vice president, SQUAN, a telecom network services company.
“If you look at the need for capex spend to maintain the network, Sprint is in a bad position,” he said. “I think the deal has to happen. The two smaller carriers combined will make a more formidable third player in the ecosystem than they do on their own.”
Each carrier brings something important to the marriage. Sprint brings spectrum and T-Mobile brings money.
“On the spectrum side Sprint has a treasure trove, but they don’t have the money to deploy it all. That, in and of itself, plus the fact that T-Mobile needs spectrum is reason for the merger. Together they become a viable third entrant, or re-entrant as a combined entrant, into the market,” Pennachio said. Merger plans have not slowed down the build out plans of either carrier, he added.
So, from the wireless industry perch: maybe a good deal.
The regulators are mostly concerned with consumer costs. On June 26, the Wall Street Journal reported that the New York attorney general’s office was looking at how the merger would affect competition in the pre-paid wireless market. The New T-Mobile would serve 30 million such subscribers. In the end, it may get down to whether the government favors competition in the 5G market, which T-Mobile execs have sworn they will serve, or the low-end market, which might get left behind.
J. Sharpe Smith
J. Sharpe Smith joined AGL in 2007 as contributing editor to the magazine and as editor of eDigest email newsletter. He has 29 years of experience writing about industrial communications, paging, cellular, small cells, DAS and towers. Previously, he worked for the Enterprise Wireless Alliance as editor of the Enterprise Wireless Magazine. Before that, he edited the Wireless Journal for CTIA and he began his wireless journalism career with Phillips Publishing, now Access Intelligence.