T-Mobile US and Sprint are putting the final touches to a merger deal that could be announced as early as next week, according to various mainstream press reports that cite sources close to the matter. (See Sprint & T-Mobile Talk M&A Again – Report.)
A tie-up between the companies, which operate the third- and fourth-biggest mobile networks in the US, has been a possibility since 2013, when they first held merger talks. Both operators see the attractions of teaming up to provide a stronger challenge to market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).
Plans fell apart several years ago due to opposition from regulatory authorities worried about the impact a merger would have on competition. Efforts were abandoned last year when Deutsche Telekom AG (NYSE: DT) and SoftBank, the respective majority owners of T-Mobile US Inc. and Sprint Corp. (NYSE: S), failed to reach an agreement on the terms of a deal. (See Sprint, T-Mobile Merger Falls Apart (Again!).)
But the companies are reportedly close to finding a solution. According to Reuters, which first broke news of the latest discussions late on Thursday, the agreement is focusing on how the companies will exercise voting control over the merged entity.
Deutsche Telekom, which owns 63% of T-Mobile US, would accordingly be able to consolidate the combined company on its accounts even without holding a majority stake, reports Reuters.
This could help to satisfy SoftBank Corp. owner Masayoshi Son, who appeared to call off negotiations in November, worried he would have to cede control to Deutsche Telekom.
SoftBank owns 84.7% of Sprint, but the US operator has lost ground since it first held talks with T-Mobile in 2013. It has traded positions with T-Mobile in the market share rankings, and its market capitalization is down at just $24 billion, compared with T-Mobile's $55 billion.
News of the latest discussions had the usual buoyant effect on company share prices. Sprint's share price was up 9% in New York during after-hours trading on Thursday, and T-Mobile's rose 4%.
But even if the company bosses can overcome their differences, a deal could once again founder in the face of regulatory hostility. Last year, company executives sounded optimistic that competition authorities under President Donald Trump would be willing to approve mergers that Obama-era figures had opposed. Yet some analysts remain unconvinced.
The Department of Justice, notably, is trying to block AT&T's $85 billion takeover of content giant Time Warner because it is concerned about the pricing power the combined company would have.
Even if a deal were eventually to proceed, it may struggle to live up to expectations. T-Mobile has grown rapidly thanks to pricing and service innovation, while Sprint has been forced to adapt following a long period of decline.
Bringing together two very different working cultures and networks could be a formidable challenge. At the very least, it would distract the attention of T-Mobile CEO John Legere from marketing innovation (and badmouthing rivals) while he oversees the integration. The combined company seems likely to be a sluggish beast next to the fast-moving T-Mobile.
But the companies evidently believe a merger is necessary to address future investment and competition challenges. The bill for rolling out future 5G networks could be astronomical in a country as large as the US. A Barclays report in 2016 estimated that blanketing the US with a 5G network based on higher frequency bands would cost as much as $300 billion. (See How Much Will 5G Cost? No One Has a Clue and Is T-Mobile's 5G Plan Just a Pipe Dream?.)
Companies are certain to rely on much lower spectrum bands in all but the most densely populated communities. Yet even with these airwaves T-Mobile could be facing a bill of around $25 billion to construct a nationwide 5G network, Ovum Ltd. analyst Daryl Schoolar previously told Light Reading.
Judging by experience, the rollout of a next-generation mobile technology is unlikely to boost service revenues for operators. As a result, operators in many countries will probably take around seven years to build nationwide 5G networks, according to Bengt Nordström, the CEO of the Northstream consulting group. Moving any faster might lead to a sharp increase in capital intensity (capital expenditure as a percentage of revenues).
Rollouts could happen more quickly in the US, where operators have seemed especially keen to advertise the latest network technologies to their customers. AT&T has even latched on to the term "5G Evolution" to describe an advanced 4G service.
— Iain Morris, International Editor, Light Reading