Sprint, T-Mobile Merger Closer to Happening

Sprint (NYSE: S  )  has cleared a significant hurdle in its attempt to acquire T-Mobile (NYSE: TMUS  ) . Germany's Deutsche Telekom AG, which owns 67% of T-Mobile, is willing to hold on to that stake if a deal can be reached to merge the United States's third and fourth place wireless companies.

Deutsche Telekom's stake in T-Mobile was worth over $27 billion as of May 30. By agreeing to stay on as a minority partner, the company makes it easier for Sprint's principal owner, Softbank  (NASDAQOTH: SFTBF  ) , to finance an overall purchase of T-Mobile. Deutsche Telekom and Sprint have not reached a final agreement as to exactly what stake Deutsche Telekom will keep, however. Reuters reports Deutsche Telekom could retain a roughly 15% stake in T-Mobile as part of a deal, writing, "That would help reduce the size of the equity check that Sprint has to write for T-Mobile US."

Though it appears to be moving closer, no terms for a deal have been agreed upon between Sprint and T-Mobile nor has a financing plan been approved. A potential deal will also face significant U.S. regulatory hurdles because it will shrink the number of major mobile phone providers nationwide from four to three.

Sprint's chairman wants this deal
Softbank Chairman Masayoshi Son, who also serves as chairman for Sprint, has long wanted to get a deal completed with T-Mobile because he believes the two companies on their own are not large enough to compete with market leaders AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . Son believes the market domination from the top two companies has led to slower broadband speeds for consumers, and has argued that a Sprint/T-Mobile combination would create a player with enough money to make the required massive network upgrades to correct this.

Son spoke at the first annual Code Conference held last week,  expressing his disbelief at how bad U.S. Internet service is.

"This is the country that invented Internet," he said to Re/code co-founder Walt Mossberg. "How can Americans live like this?"

Re/Code did a live blog of Son's talk with Mossberg, which highlighted a number of points made by Son.

  • The U.S. created the Internet, but its speeds rank 15th out of 16 major countries, ahead of only the Philippines. (Mexico is no. 17, by the way.)
  • The dominant players in wireless and fixed-line communications have returned $100 billion in dividends to shareholders, but have not focused on improving speeds.
  • Neither Sprint nor T-Mobile have sufficient scale to compete nationally.
  • The U.S. became a giant in the 20th century because of infrastructure -- highways and electricity. In the information age, however, it's lagging.

Combining Sprint and T-Mobile would allow the two companies to better compete. U.S. regulators may very well get in the way of the deal, but it seems hard to argue that Americans need four national mobile phone companies. Having three when one of them has pledged to disrupt the current method of doing business seems much better for consumers than having two giants and two bit players that can't really afford to compete.

U.S. regulators rejected AT&T's $39 billion takeover bid for T-Mobile US in 2011, so there is no guarantee that it will be approved even if it makes sense.

Where does the deal stand now?
Son refused to specifically address the proposed purchase of T-Mobile, though the Deutsche Telekom news makes it clear that one is being negotiated. It's likely Deutsche Telekom will be "more accommodating with Softbank regarding a break-up fee than it was with AT&T," Reuters reports. That is likely because in this case, T-Mobile will be the brand used by the surviving company with its CEO, John Legere, running the new entity. Should the deal not win approval, T-Mobile would likely emerge in a better position than Sprint under that scenario.

Legere is the key
T-Mobile has been growing its customer base using an ambitious marketing plan that openly mocks other mobile phone companies. Billing itself as the "un-carrier," the company has lowered pricing, offered to pay early termination fees, and generally attempted to shake up the industry. Legere has been leading those efforts in a bold, brash style that has brought him a lot of attention. That sort of bluster can backfire, but so far Legere has produced strong results. 

In the first quarter of 2014, T-Mobile added 2.4 million customers -- the first time the company has added more than 2 million in a quarter. Sprint lost customers for the quarter, as did Verizon. AT&T gained. Legere's style can best be explained by a Tweet he sent after learning that Sprint had dropped for the quarter.

"Sounds like a lot of people took my advice to #SprintLikeHell," he wrote on Twitter.

Legere's style may eventually wear thin with the public, but it's perfect for a combined Sprint/T-Mobile that is attempting to take on AT&T and Verizon.

This deal should happen
The reason that regulators worry about two of the four mobile phone companies merging is that it creates less choice for American consumers. That's true on a numerical level, but not on a practical one. The status quo of Verizon, AT&T, and Sprint did nothing to lower prices for years until Legere decided to end the industry's quasi-collusion and get aggressive on price.

It should also be noted that while there are only four major players, there are numerous smaller ones including a number of very low-cost option like FreedomPop, which operates by leasing network space from Sprint. With most Americans having at most three but more likely two (and in some cases one) choices for home broadband, it seems that three major choices and numerous smaller ones should be enough for mobile phones. It may take a while, but Son appears to moving closer to joining Sprint and T-Mobile. If he succeeds, this should benefit the American consumer.

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