Could Carlos Slim Steal T-Mobile From Sprint?

For months, the merger of Sprint  (NYSE: S  ) and T-Mobile  (NYSE: TMUS  )  has seemed like an inevitability.

The two companies stand essentially tied for third in the U.S. mobile phone market behind giants AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . With Sprint having aggressive owners in SoftBank (NASDAQOTH: SFTBF  ) , which has a CEO who believes the company needs greater scale to compete with its bigger rivals, the deal has seemed done, except for the details.

But maybe it isn't. Perhaps the brash actions of T-Mobile CEO John Legere have gained the attention of another billionaire who likes to make bold moves: Carlos Slim. The Mexican billionaire recently sold a number of assets in his native country to avoid problems with regulators. This has left him with a sizable amount of cash to make purchases throughout the rest of the world.

T-Mobile fits his portfolio, as Slim already owns TracFone, the fifth-largest U.S. wireless provider. Under various brand names, including the Straight Talk brand sold at Wal-Mart  (NYSE: WMT  ) , TracFone sells prepaid phone service. T-Mobile also has some prepaid products, but the combination of the two brands makes sense, as the merged company would have products for all segments of the market.

Why is Slim interested?
TracFone has steadily grown by buying smaller prepaid carriers. The business rents space on networks owned by bigger carriers, including Sprint and AT&T. T-Mobile owns its own network, which is certainly not as big as those owned by AT&T and Verizon, but it could handle much of the TracFone traffic. That takes an expense for TracFone and turns it into a lower, internal cost that's more investment than liability. T-Mobile also needs to spend significant money upgrading and expanding its network. Being able to use some of the money TracFone pays competitors to carry its traffic could serve to turn a loss into the building of tangible assets.

"A more meaningful entry into the U.S. with the acquisition of [T-Mobile] could make strategic sense," UBS analyst John Hodulik told The Wall Street Journal. Hodulik projects Mexican asset sales would yield more than $15 billion for Slim -- not enough to cover the $30 plus billion acquisition -- but a nice piece of it.

A combination of TracFone and T-Mobile would also offer a logical upgrade path for TracFone customers, which should lead to more revenue per customer. Slim's company currently makes much less money per subscriber than the four bigger mobile carriers, even when you only look at their prepaid options.:

Prepaid average revenue per user Q1 2014  
Verizon Wireless $46.42
AT&T Mobility $38.32
T-Mobile $35.89
Sprint $28.11
Trac-Fone $21.58

Data from UBS

TracFone has generally been marketed as a phone option for the credit-challenged. There is a bit of a stigma associated with having a TracFone plan. Some of the company's brands do allow customers to buy higher-end devices including iPhones, but to get those phones a customer must pay full price up front. The same is true when subscribers to TracFone or one of its sub-brands bring their own device -- they have to pay for it all at once. 

In general, if you don't want to pay a huge premium up front (which sort of defeats the purpose of using an ultra-cheap service), you have to pick an older, less fancy phone. While these models have gotten better and include some Android smart phones they still mark the user as a TracFone customer.

Also, currently if a TracFone customer wants to move on to a traditional contract-based plan with a high-end phone it means leaving for another carrier. If the company merged with T-Mobile, customers could upgrade to T-Mobile's prepaid offering, which includes access to higher-end phones, and eventually to the company's non-contract plans. That would make the combined entity a mobile phone carrier that could offer service to all customers -- from the economically disadvantaged to the wealthy.

Will it happen?
The deal between Sprint and T-Mobile seemed pretty much done -- CNBC.com reported in June that the two sides had agreed on the terms of a $32 billion deal that is likely to be announced this summer. The news site did acknowledge that "talks are incomplete and could still fall apart. But the agreement on terms represents a turning point in a relationship between two companies that have long contemplated a merger." 

That news was reported on June 4. Now, more than six weeks later, it raises questions as to why the two companies -- which seem eager to make a deal -- have yet to finalize their agreement.

One major problem could be U.S. regulators, which have generally not been positive on the idea of four major mobile carriers becoming three -- even if the new No. 3 is in much better shape to be a real competitor.

TracFone is unlikely to face the same hurdles, as it would simply be creating a stronger third-ranking player while Sprint would remain in business. That would leave four companies as consumer options.

If Slim is interested, the TracFone/T-Mobile makes more sense than the mashup of T-Mobile in Sprint. If TracFone does the deal, it gets a network and new products it does not offer. If Sprint does the deal, it gets more of what it already has.

Slim should step up and make this happen.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2014, at 12:35 PM, Iamore wrote:

    Daniel raises interesting points:

    Tracfone ended 2013 with 23.7 million MVNO subscribers. These subscribers could more easily become targets for conversion to T-Mobile's network than open-market attack on AT&T and Sprint by offering customers deeply discounted 'upgrade deals' to SmartPhone devices that run on T-Mobile's network. In the process, T-Mo might try to sweeten the ARPU of converting Tracfone subscribers by offering competitively priced added data plans.

    A primary factor in scale is spread of capex over subs. While Carlos Slim's Tracfone does not bring together two sets of network operations, it does bring together an enhanced chance to lower T-Mo's cost of operation and afford the next stage of network-market expansion.

    The caveats are that Tracfone serves the low price part of the market. The broader quest besides scale is for T-Mobile and Sprint to upscale their service coverage, quality, breadth of services including expansion into TV/media and vertical markets that drives higher ARPU.

  • Report this Comment On July 23, 2014, at 1:03 AM, ecbatana wrote:

    Slim is not an idiot and knows very well that Charlie Ergen's Dish also has his eye on TMUS. For Carlos Slim Haddad to make a move on TMUS at a price close to $40 would be putting good money to waste.

  • Report this Comment On July 23, 2014, at 1:18 AM, ecbatana wrote:

    Other than spending $35 Billion to upgrade Sprint's Network in the next four and a half years, Softbank intends to accelerate the buildout of its Spark network by another $20 Billion if the merger is sanction.

    Remember Sprint's network is already in the process of being completely built out and the TMUS merger would only accelerate its LTE spark network.

    Let's not forget Softbank is the largest shareholder in Alibaba Group Holdings with a one third stake in the company, which should elevate its CEO, Masayoshi Son, to the pinnacle of the Forbes billionaire list with $90+ billion in assets.

    What you most likely are going to see is the FCC granting the S/TMUS merger which will eventually incorporate Dish.

  • Report this Comment On July 23, 2014, at 1:29 AM, ecbatana wrote:

    Other than spending $35 Billion to upgrade Sprint's Network in the next four and a half years, Softbank intends to accelerate the buildout of its Spark network by another $20 Billion if the merger is sanctioned.

    Remember Sprint's network is already in the process of being completely built out and the TMUS merger would only accelerate its LTE spark network.

    Let's not forget Softbank is the largest shareholder in Alibaba Group Holdings with a one third stake in the company, which should elevate its CEO, Masayoshi Son, to the pinnacle of the Forbes billionaire list with $90+ billion in assets.

    What you most likely are going to see is the FCC granting the S/TMUS merger which will eventually incorporate Dish.

    The FCC gave Dish a limited amount of time to put its 40 Mhz to use or else it will be taken back. Building a new network from scratch would be a very, very expensive proposition that neither Ergen or Slim would want to undertake. The CapEx. to build a competitive independent Wireless carrier are just enormous, even for the likes Slim and Ergen's Dish Network. Owing to this I see synergies being played between Dish and Sprint where Sprint will host most of Dish's spectrum.

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