The regulatory environment under Trump makes it far more possible, but T-Mo may still be playing hard to get.
You might say they’re made for each other. In the wireless market you have four main players. Two of them—AT&T and Verizon—tower over the others (T-Mobile and Sprint). A combination of the little guys might actually be able to compete with the big guys. And, believe it or not, even consumers might benefit.
It’s not quite that simple, of course, but 2017 could once again see Sprint court T-Mobile. Sprint tried for the merger in 2014, but the deal fell through when it became clear that the FCC wouldn’t approve it.
But a lot has changed since 2014. Most importantly, we now have a GOP-controlled FCC that’s far less likely to reject a merger. New FCC chairman Ajit Pai disagrees with former chairman Tom Wheeler’s belief that true wireless competition requires a four-carrier race.
The FCC is currently engaged in a spectrum auction, and during that time no bidding company can hold formal merger discussions. But after the auction is over and the prohibition lifted, M&A talks are likely to begin in earnest, industry experts tell Fast Company.
“In wireless, consolidation is already so widely expected that it has arguably been fully priced into the stocks and then some,” MoffettNathanson analyst Craig Moffett says via email.
At least one telecom analyst is fairly sure that Sprint and T-Mobile will begin merger talks immediately after the auction concludes.
“We continue to believe a Sprint/T-Mo announcement is likely given the benefits of moving from four wireless players to three and the significant synergies it would create,” writes UBS analyst John Hodulik in a recent investor brief. “In addition, we believe the timing is appropriate: (Sprint’s parent) SoftBank has already recovered its cost basis, turned the asset [Sprint] around operationally and financially . . .”
Sprint has managed in the past few years to build out its network to improve its coverage and capacity. It’s stopped bleeding subscribers every quarter. And it also holds a lot of valuable 2.5 Ghz spectrum that could greatly benefit T-Mobile. In addition, SoftBank has already signaled that it might be OK with T-Mobile controlling the combined company’s network and business.
T-Mobile has prospered during the last few years, and has now overtaken Sprint as the No. 3 carrier. “There are still very real questions about when T-Mobile will be as eager as Sprint,” Moffett said. “T-Mobile arguably gets paid to wait, as they’re getting stronger while Sprint is getting weaker.”
Still, wireless companies like Sprint and T-Mobile have good reasons to seek merger opportunities. They need to increase their scale or broaden their product offerings, because selling broadband and voice service is no longer the high-growth business it used to be. Finding new customers has gotten harder, and competition has tightened. In fact, for three of the four big wireless carriers, revenues have shrunk over the past year. Meanwhile, the wireless carriers are now faced with the expensive prospect of rolling out fancy new 5G networks.
The recent comments of T-Mobile executives have been telling. T-Mobile CFO Braxton Carter recently said at an investor conference that he believes some type of merger activity is inevitable. “There are significant benefits that we’ll see with convergence, both from a wireless carrier standpoint as well as a broadband cable standpoint.”
But Carter expressed doubt that another try at a Sprint/T-Mo tie-up would end well. Regulators, he says, never really change, and the risk of a rejection on anti-trust or anti-competition grounds is real. Carter suggests that T-Mobile might be more likely to merge with a cable or satellite provider. A merger with Sprint would make T-Mobile more able to take advantage of economies of scale, while a merger with a cable provider would give it a whole new set of products to sell.
But Carter’s comments might just be T-Mobile playing hard to get, which could strengthen its hand in any eventual merger negotiations with Sprint. T-Mobile US CEO John Legere has also played down the chance of a Sprint merger.
” . . . they [T-Mobile] are likely to at least test the waters with some of the possible alternatives to a Sprint deal, like one with Dish or cable, before they fully commit,” Moffett says.
T-Mobile’s U.S. CTO, Neville Ray, speaking at a telecom conference in London recently, says his company isn’t currently entertaining a Sprint courtship, but went a long way to point out that T-Mobile could integrate Sprint’s network and customers if it came down to it.
“When I think about network integration, and migrating Sprint customers on to a better network performance and better coverage, it is a good thing,” Ray said. “Migrating from a lesser performing network to a better one is a plus.”
Even in a favorable regulatory environment it’s hard to predict what might happen. Wells Fargo equities analyst Jennifer Fritzsche wrote in a recent investor brief: “While we do believe Sprint likely will strike toward T-Mobile while a Republican administration is in the majority, in many ways, predicting moves of the next few months (especially the weeks after the broadcast auction results are disclosed) is a bit like trying to predict moves in a chess game.”
So stay tuned. A Sprint-T-Mobile merger could have a real impact on your monthly cellular service bill, regardless of who your carrier is. The competitive environment would be radically changed. It’s just hard to tell if it would be a change for the better.