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Sprint, T-Mobile strike $26.5 billion deal to take on AT&T

April 29, 2018

T-Mobile US Inc. and Sprint Corp. agreed to combine in a $26.5 billion merger, creating a wireless giant to compete against industry leaders AT&T Inc. and Verizon Communications Inc.

Deutsche Telekom AG, the Bonn, Germany-based company that controls T-Mobile, and SoftBank Group Corp., the Tokyo-based owner of Sprint, agreed to a combination that values each Sprint share at 0.10256 of a T-Mobile share, the companies said in a statement Sunday. That ratio values Sprint at $6.62 a share based on T-Mobile’s Friday closing price of $64.52.

“This combination will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation, and a second-to-none network experience,” John Legere, the T-Mobile boss who will serve as chief executive officer of the combined entity, said in the statement. The changes will come faster than either company could do on its own, he said.

Operating as T-Mobile, the company would have about $74 billion in annual revenue and 70 million wireless subscribers. Verizon is the largest U.S. carrier with $88 billion in 2017 wireless revenue and 111 million subscribers, and AT&T would be No. 2 with $71 billion in wireless revenue and have 78 million regular subscribers.

T-Mobile’s Mike Sievert will be president and chief operating officer. The German company’s chairman, Tim Hoettges, will serve in that role at the combined company, and the board will include SoftBank Chief Executive Officer Masayoshi Son. The companies said they expect synergies of about $43 billion based on net present value, with more than $6.5 billion on a run-rate basis.

Third Attempt

The latest negotiations, coming about five months after an earlier merger attempt collapsed, follow years of will-they-won’t-they deliberations. Previous negotiations broke down after the two sides couldn’t agree on how to structure control of the combined entity, people familiar with the matter said at the time. The deal marks the third time Son has acted on his long-held plan to combine Sprint and T-Mobile.

Deutsche Telekom will end up with a 42 ownership stake while SoftBank will have 27 percent. Sprint closed Friday at $6.50 a share.

The two carriers have complementary wireless spectrum that may be a strategic advantage as the companies build a faster fifth generation or 5G network. T-Mobile controls a large portfolio of lower-band airwaves that can travel long distances and pass through walls and windows. Sprint has the largest U.S. holding of higher-band, 2.5 gigahertz spectrum that can handle more data capacity but over limited distances.

Sprint and T-Mobile together create a larger third competitor that “should be growing at a materially faster pace” than its larger rivals while capitalizing on estimated total cost benefits of about $64 billion, Jonathan Chaplin, an analyst with New Street Research LLC wrote in a note April 15.

Washington Scrutiny

The deal will face heavy regulatory scrutiny because it reduces the wireless industry to three major competitors from four. The companies dashed a previous plan to merge in 2014 after meeting resistance in Washington. Regulators said that a four-competitor wireless market fosters more choice, price competition and innovation, which proved to be largely true.

Sprint and T-Mobile will try to convince regulators and possibly President Donald Trump that the combination will lead to bigger investments in 5G networks and put pressure on larger rivals, even though consumer benefits aren’t obvious and heavy job cuts are expected. The Trump administration is currently trying to stop AT&T Inc.’s $85 billion takeover Time Warner Inc., saying the deal will lead to higher pay-TV prices.

For Sprint, which hasn’t had a profitable year in more than a decade, the merger is a bailout. The company is four years into a go-for-broke turnaround effort launched when Marcelo Claure took over as chief executive officer and started slashing prices on phones and offering half-off service plans to stop customer losses.

Sprint Cash Burn

But the price battles only further fueled the cash burn. The need for more and more financing took the company back to the junk-bond market in February after a three-year absence. In March, Sprint sold a second round of airwave-backed bonds.

Under Legere’s leadership T-Mobile became the fastest growing carrier gaining more than 6 million subscribers over the past three years, though the pace of that growth has steadily slowed. T-Mobile has forced the industry to try and match its sales techniques like offers including phone financing, free video streaming and unlimited data plans.

For SoftBank, the transaction puts the mobile-service empire that billionaire CEO Son built in a better position to compete with U.S. cable companies by offering high-speed wireless internet connections and streaming video. The combination also gives Deutsche Telekom a stronger vehicle to expand in the profitable U.S. market.

Deutsche Telekom and T-Mobile were advised by Goldman Sachs and PJT Partners, with Evercore advising the independent directors. The Raine Group and JPMorgan advised SoftBank and Sprint, with Centerview Partners helping the special committee of directors.

 

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