John Legere always talks a good game. Sometimes it is tough separating the hype from reality, however. Last week, he continued to make his case for T-Mobile’s merger with Sprint, promising faster speeds, lower costs and increased employment in a blog. The merged company will invest nearly $40 billion and will have spectrum and capacity needed for a “broad and deep” nationwide 5G network, the T-Mobile CEO said. Rural coverage will be a big emphasis, he said, which should get the support of Congress.
He said the merged company will provide 5G speeds that are five times faster than the LTE speeds by 2021, while increasing LTE speeds.
“At full deployment the New T-Mobile will deliver fiber-like speeds. I’m talking about average speeds at a blazing 444 Mbps, covering about two-thirds of the country, with jaw-dropping peak speeds up to 4.1 Gbps!!” Legere said.
One of the merger tests that the New T-Mobile must pass is whether their marriage of the two wireless companies will reduce competition and increase costs to the consumer. Legere held that costs will actually go down.
“Analysis by renowned economist Dr. David Evans concludes that the building of the New T-Mobile 5G network will provoke competitive responses from Verizon and AT&T that will result in a decrease in the cost of a gigabit of up to 55 percent and over a 120 percent increase in mobile data supply for all wireless customers,” he said.
Addressing concerns that large swathes of America are unserved or underserved, he said that the merger will result in mobile broadband speeds in excess of 100 Mbps to roughly two-thirds of the population in just a few years and 90 percent of the country by 2024.
“This deal enables New T-Mobile to increase coverage in rural America and create more competition for wireless, broadband and beyond. Case in point: we estimate that 20-25 percent of those new broadband subscribers will be located in rural areas,” Legere said.
As opposed reducing jobs, which most mergers do through taking advantage of synergies, Legere plans on creating 3,000 direct jobs in the first year, increasing to more than 9,600 direct and indirect jobs by 2021 and more than 11,000 by 2024.
“Every day we will have more jobs as the New T-Mobile than the two stand-alone companies would have on their own,” he said. “As we build out our new 5G network and bring these services to all parts of the country we will create thousands of job opportunities.”
No one knows if the Federal Trade Commission will okay the merger, but Legere checks all the boxes that regulators will scrutinize. The merger will increase competition with Verizon and AT&T, he said, lowering consumer costs and establishing competition in rural areas, in places where it doesn’t exist today. And increased employment would be the frosting on the cake. For the wireless infrastructure industry, the promise of a $40 billion capex infusion might be enough to take the sting out of the planned decrease in towers.
Sprint has appointed Michel Combes to the role of CEO, moving Marcelo Claure into a new position as executive chairman, in its first post-merger personnel announcement. In their new roles, Claure and Combes will collaborate on the continued execution of Sprint’s strategy as well as its planned combination with T-Mobile. Claure, who has served as CEO since 2014, will remain a part of the Sprint senior management team. The transition is expected to occur on or before May 31, 2018.
“Marcelo has done a remarkable job of turning around the Sprint brand and business, driving enhanced network performance, strong subscriber growth and significant cost reductions leading to the best financial results in Sprint’s history,” said Masayoshi Son, chairman and CEO of SoftBank Group Corp. “Marcelo has also positioned Sprint as a leader in the race to 5G, which promises to revolutionize the communications industry. He will continue to guide Sprint’s strategy and momentum as Executive Chairman through a successful closing with T-Mobile.”
In connection with these changes, Sprint has initiated a search for a new chief financial officer. The Company will consider internal and external candidates.
Separately, SoftBank Group Corp. today announced that Marcelo Claure will assume the role of chief operating officer of SoftBank Group and CEO at SoftBank Group International. Among his other duties, Claure will continue to oversee SoftBank’s investment in Sprint and the combined Sprint / T-Mobile company following the closing of the companies’ pending merger.
Despite cutting $1.1 billion in operating expenses over the past year, Sprint’s consolidated operating margin fell 260 basis points to 2.9 percent in 1Q18. Sprint’s wireline business was a significant drag on its consolidated margins, reporting negative operating income of $107 million as the segment lacks the scale to compete against larger wireline rivals such as AT&T, Verizon and CenturyLink.
If the T-Mobile and Sprint merger is successful, TBR expects T-Mobile will likely divest Sprint’s wireline business due to its limited profitability and the division not complementing the company’s core strategic objectives. Though Sprint’s postpaid subscriber net additions improved year-over year (39,000 in 1Q18 vs -118,000 in 1Q17), the company was challenged by high wholesale subscriber losses (-165,000) and falling ARPU stemming from the carrier’s aggressive pricing promotions, contributing to wireless revenue falling 4.6 percent year-to-year. Sprint’s operating margin is also negatively impacted by rising deprecation costs related to its network infrastructure and devices offered as part of its leasing program.
Though Sprint is taking the right steps to cut expenses, the company’s long-term financial position remains uncertain due to the company’s high debt load and struggle to generate adjusted free cash flow (-$240 million in 1Q18) while balancing additional capex spending. These financial difficulties illustrate why the T-Mobile merger is vital to Sprint and that its challenges will only intensify heading into the 5G era. Remaining a standalone company will require intensified investment for Sprint to compete against its rivals in the 5G market, which would likely further weaken Sprint’s financial position. If approved, the merger would serve as a lifeboat for Sprint’s financial challenges and wireless churn among Sprint’s subscriber base would decrease as customers transition to T-Mobile’s higher-quality network. Additionally, the combined company would be able to accelerate 5G deployments by leveraging T-Mobile’s 600MHz spectrum with Sprint’s vast 2.5 GHz licenses, which are expected to provide nationwide average network speeds 15 times faster than current LTE speeds by 2024.
Steve Vachon an analyst for Technology Business Research, and independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, networking equipment, wireless, portal and professional services vendors. Serving a global clientele, TBR provides timely and accurate market research and business intelligence in a format that is uniquely tailored to clients’ needs. TBR analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.
Those in the wireless infrastructure industry reading the tea leaves after yesterday’s announcement of the T-Mobile/Sprint merger were left with mixed emotions. Macro sites will decrease, while small cells used for 5G will get a shot in the arm. Tower services companies will benefit either way.
The merged company will invest $40B in the network but will also decommission 35,000 macrosites and add 10,000 towers and 50,000 small cells. In sum, 110,000 macro sites will be reduced to 85,000 towers, according to T-Mobile US CEO John Legere. “About $26B of the $43B [in synergy from the merger] is from network: site decommissioning and site avoidance,” Legere said.
While the tower industry will definitely lose sites and money as a result of the merger, Keith Pennachio, EVP at SQUAN, said the deal will make the carriers more competitive, which will be good for the tower industry in the long run.
“The T-Mobile/Sprint merger has me somewhat conflicted,” he said. “I think that from a high level point of view, the industry needs the consolidation and the timing feels right. The amount of spectrum Sprint owns combined with the forward-thinking ‘un-carrier’ attitude of T-Mobile makes the merger formidable for the competition of the combined entity. Sprint’s debt load is unsustainable in the long run, which could hamper CAPEX spend for 5G deployment on the broadest scale. It’s only a matter of time before cash constraints put Sprint further behind.”
Legere and Sprint CEO Marcelo Claure appeared on CNBC’s “Squawk on the Street” to discuss how the merger would result in an increase in jobs, benefit competition and push the United States toward 5G technology. All talking points for the regulators.
One of the biggest fears when a merger is announced is that infrastructure buildout may be put on hold. Claure said his company will not back off during the regulatory review period. Claure and Legere expect the merger approval process to take 18 months.
“We’re gonna continue to attract AT&T, T-Mobile, and Verizon customers into the Sprint network,” Claure said. “We’re going to invest. This is gonna be the largest investment in Sprint in terms of continuing to build our 5G network. So we’re competitors and we’re gonna continue to run the company the same way the last four years.”
Sprint and T-Mobile US each account for 8 percent of American Tower’s consolidated property revenues. On sites where both companies had separate leases for antenna space, the revenue generated from Sprint and T-Mobile represent 4 percent and 3 percent of American Tower’s consolidated property revenues, respectively. The average lease term on these sites with Sprint and T-Mobile US is three to four years.
Ken Schmidt, Steel in the Air, wrote that Sprint/Nextel sold its towers to SBA Communications, Crown Castle and American Tower, while T-Mobile sold its towers to Crown Castle and American Tower. T-Mobile was the anchor on many of the build-to-suit towers purchased by SBA.
“So, looking at same-company towers ignores nearby cell sites on towers by other tower companies and even worse, those macrocells on non-tower company structures like buildings, water towers, and billboard,” Schmidt wrote. “They indicate that 35,000 sites will be terminated which will almost all likely be Sprint sites and many of which are not on towers where T-Mobile is as well but on other towers nearby.”
MoffettNathanson Analyst Nick Del Deo wrote that the deal would not be good for towers, but he held that a consolidated T-Mobile/Sprint would create room in the wireless market for a new entrant. The obvious possibility would come in the form of a combined Charter/Comcast. Interestingly, in the first quarter of this year, Comcast added more postpaid phone customers than AT&T and Verizon combined.
“If successfully concluded, [the Sprint/T-Mobile deal] would be a negative for the Towers, at least in the medium-term (if consolidation stimulated the entry of a new fourth player, it could be modestly positive over the long-term),” Del Deo wrote.
Now It’s Up to the Feds
The resulting company, which will use the T-Mobile name, Legere will have pro forma revenue this year of $75 billion, and service revenue is $55B to $57B. In 2025, he projected the merged entity would generate $16 – $18 billion dollars of free cash flow. The company would also have 67 percent market share, inviting close scrutiny by the feds.
The deal will soon be examined by the Department of Justice, which will judge whether it reduces competition in the marketplace Legere wasted no time in making his case that the merger will be healthy for the marketplace. He made the case the DoJ must approve the merger to allow the United States compete global in the so-called race to 5G, citing the CTIA study that said China is ahead.
“It’s the early innovation cycle of 5G,” Legere said. “We are behind China. This is not something we can allow. This will be the first company — because of our available spectrum in the 600 MHz and 2.5 GHz bands – to build the nationwide broad coverage 5G service.”
Legere expects that the new T-Mobile’s $40B investment will push AT&T, Verizon and Comcast to pony up an additional $20B.
“That’s a story that Washington wants to hear,” he said. “It’s not about four to three. It’s about zero to one [5G network]. “This deal will get approved because it’s great for the United States.”
Claure said the merger is unique, and ostensibly should be approved by regulators, because it will allow T-Mobile and Sprint to build a 5G network that will be more competitive in the marketplace.
“We’re actually going to offer the best products, best services at lower prices,” he said. “So we plan to make the market more competitive. You’ve seen two disruptive companies, T-Mobile and Sprint. Together, we can turbo charge that.”
Claure said, as a result of the merger, the company would add tens of thousands of jobs in the first three years.
“This is a growth story in which the synergies – the synergies of this deal are more valuable than each company on a stand-alone basis. So I think this is an amazing deal for everybody around,” Claure said.
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. Sharpe Smith may be contacted at: firstname.lastname@example.org.
I’m sure you saw that the Wall Street Journal reported this week T-Mobile and Sprint are once again flirting with each other, just several months after their parental chaperones told them to stop talking and come back home. Not surprisingly, the Towers sold off on this news.
We’ve published quite a bit on the effects a deal would have American Tower, Crown Castle, and SBA. “U.S. Towers: Churn Down for What? Dimensioning TMUS/S Consolidation Risk and What’s in the Stocks,” November 14, 2016 being our most recent “real” report on the topic), and a number of clients have asked if the math we used back then is still appropriate. The short answer is yes, but we thought it might be helpful to quickly refresh the numbers (Chart 1) and very briefly review the ideas behind them. If the deal happens and there are no offsets, we’d estimate an $8 per share hit to American Tower, $9 to Crown Castle, and $14 to SBA.
We’ve always thought same-tower overlaps – the metrics reported by the towercos to dimension this risk – understated the number of sites that would be decommissioned in a deal. In practice, T-Mobile and Sprint would choose a “surviving” network, presumably T-Mobile’s, and migrate spectrum from the “legacy” network over. When the legacy network’s spectrum and subscribers had been migrated, the legacy network would be shut down. A chunk of legacy sites would be retained, and some number of sites from the surviving network decommissioned. It’s part art, part science, but we’ve assumed ~60 percent of Sprint sites and ~15 percent of T-Mobile’s would ultimately go away. As a partial offset, the companies would have to upgrade all the sites they retain to accommodate each other’s spectrum bands – Sprint’s 800 MHz and 2.5 GHz on T-Mobile’s sites, and T-Mobile’s 600 MHz, 700 MHz, and AWS on Sprint’s sites – which would entail amendment revenue. Leasing activity would likely initially increase as the networks were prepped for spectrum migrations, and then churn would hit as leases ran out, with an average term of five years or so (we would note that the MLAs Sprint recently signed with Crown Castle and SBA included term extensions on at least a portion of its sites, so that would shield them for a couple more years). The present value of what’s being lost, netted against the interim benefit of heightened leasing activity, yields the NPV hit.
There are other factors to consider as well. For example, if Sprint and T-Mobile were forced by regulators to divest spectrum to close a deal, AT&T and Verizon would likely have to incur amendment revenue to deploy it, acting as another offset. We dimension what this might look like in Chart 1. From a bigger picture perspective, what would going from four to three players mean for the odds of Dish Network entering as a new number four? That’s hard to handicap, but the odds would be higher, and the value of a full Dish build-out would likely more than offset the hit from T-Mobile/Sprint. It’s worth bearing other limbs on the decision tree in mind.
Finally, we need to consider the probability that an agreement is reached and, if an agreement is reached, what the odds of approval in DC look like. We’re not smart enough to know what those are, but the stock reactions suggest Mr. Market is baking in a fairly high probability that it happens, at least based on our math.
I hope this refresh was helpful. Feel free to reach out to me if you want to discuss further.