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T-Mobile & Sprint: Marriage Made in Hell

Iain Morris

Wild-haired, wild-eyed, and preferring a pink T-shirt and leather jacket to the usual business attire, T-Mobile US CEO John Legere looks the antithesis of corporate America. For several years, he has lived up to the image. An uncontrollable nuisance for US telecom dignitaries AT&T and Verizon, or "dumb and dumber," as he prefers to call them, Legere has blown up the model of convention and danced cackling on the wreckage.

This has paid off nicely for the US consumer. T-Mobile's service and pricing innovation has forced dumb and dumber to get smart. Its desire to build a state-of-the-art 4G network, and planning for a 5G successor, have kept bigger rivals on their toes. Having once trailed Europe in mobile, the US is today at the forefront of the industry, poised to launch 5G services later this year.

The Wild Man of US Telecom
John Legere, the CEO of T-Mobile US, would lead a mobile operator serving 127 million customers should authorities approve a merger with Sprint.
John Legere, the CEO of T-Mobile US, would lead a mobile operator serving 127 million customers should authorities approve a merger with Sprint.

This golden age of US telecom is now under threat. Following several days of press reports, T-Mobile US Inc. confirmed at the weekend plans for a $26 billion, all-stock merger with the ironically named Sprint Corp. (NYSE: S), which it has overtaken in the last few years to become the number-three mobile operator by customer numbers. If the plans go ahead, Legere will lead an enlarged entity with more than 126 million customers, behind AT&T Inc. (NYSE: T) with 142 million and Verizon Communications Inc. (NYSE: VZ) with 150 million. (See T-Mobile to Buy Sprint for $26.5B to Create US 5G Powerhouse, T-Mobile, Sprint Agree to Merge and T-Mobile, Sprint Close to Merger Deal Reports.)

Legere's wild-man looks may remain. But just as a buzz-cut robbed the biblical Samson of his legendary strength, so the corporate makeover of a merger could tame the long-haired Legere. Instead of poking fun at his rivals, and concocting devilish schemes to poach their customers, he will have to prioritize the far less glamorous job of integrating two businesses that look very different from both a cultural and technology perspective. The days of fleet-footed growth, of being an incorrigible irritant to AT&T and Verizon, may be numbered.

Why does the country's most dynamic mobile network operator want to marry its most knock-kneed? Germany's Deutsche Telekom AG (NYSE: DT) and Japan's SoftBank, the respective majority owners of T-Mobile and Sprint, argue that an alliance will give them muscle in the fight against AT&T and Verizon. They also point to the investment needs of 5G: Going solo, each might struggle to build the nationwide 5G networks that may prove economically vital in future.

In that regard, this seems like a far better deal for Sprint than it does for T-Mobile. While the SoftBank Corp. subsidiary has been adding customers in recent quarters, it appears to have drawn interest mainly through price-cutting. For its third quarter, ending in December last year, average monthly revenue per user at its contract business fell about 9%, to $45.13, compared with the year-earlier figure. In the meantime, net debt works out to be around 2.9 times Sprint's earnings (before interest, tax, depreciation and amortization) in the 2017 calendar year, a level that looks high even by comparison with Europe's debt-burdened incumbents. The merger deal would put Deutsche Telekom outside its debt comfort zone for several years.

Following its acquisition of 600MHz spectrum last year, T-Mobile already believed it had the resources to build a nationwide 5G network by 2020, or so Legere said. But Sprint comes with a swathe of spectrum in the 2.5GHz band, which could provide some fuel for higher-speed services. What's more, there have been signs of a slowdown in customer growth at T-Mobile. That might also have driven Deutsche Telekom to more seriously look at a merger. (See Is T-Mobile's 5G Plan Just a Pipe Dream?)

By saddling Deutsche Telekom with debt, and ensnaring T-Mobile in an integration trap, that deal could be one the German operator eventually comes to regret. For just about everyone else apart from Sprint and a few rich men, it would be instantly regrettable.

Next page: End of the golden age

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User Rank: Moderator
4/30/2018 | 12:20:21 PM
Re: Only Justification?
Most MVNOs are toast if this goes through. In a 4-provider market (this is more general than just US mobiles), the top two focus on retail and the bottom two compete for wholesale (MVNO). Sprint is the big MVNO wholesale player. Carlos has his deals with ATT and VZ, but those are a special case, and cable's deal with VZ is a special case going back to the SpectrumCo deal. MVNOs and anything specialized (not consumer-oriented) will become very, very rare.
Joe Stanganelli
Joe Stanganelli,
User Rank: Light Sabre
4/30/2018 | 10:53:35 AM
Big risk that could pay off appropriately
I have some dubiousness, but I'm not quite as brashly pessimistic. T-Mobile's 5G (and, consequently, overall) fate without Sprint is safe short-term success followed by eventual irrelevance at the hands of AT&T and VZ. This kind of network infrastructure buy is a big risk, but considering that AT&T+T-Mobile was rejected, it's hard to see a better option for long-term success for T-Mobile.

Besides, it could well mean better reception inside buildings for T-Mobile customers, so that sounds pretty dandy to me! ;)
User Rank: Light Sabre
4/30/2018 | 10:51:59 AM
Only Justification?

I found this statement curious.  Did you mean from a consumer standpoint?

There are certainly more justifications from an investor standpoint.  And of course, the investors do own the companies.

Idea for an article for you guys....what will the impact be on the MVNOs?  Most of the smaller ones are on one of the two networks.  Several of the larger as well.

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