T-Mobile & Sprint: Marriage Made in Hell
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.
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