Why a Billionaire Pulled the Plug on the T-Mobile and Sprint Merger

A combined Sprint (S) and T-Mobile (TMUS 0.02%) would have claimed a comparable subscriber base to AT&T and Verizon. However, disagreements over control of the new company ultimately scuttled the deal.

In this segment of Industry Focus: Consumer Goods, the cast looks at the root issues that prevented the merger from coming together.

A full transcript follows the video.

This video was recorded on Nov. 7, 2017.

Vincent Shen: So now you have some high-level perspective of these two companies, where they are and where they've been the past couple of years. So we can talk about the deal that just wasn't meant to be. It's the second time now, right?

So on Saturday, November 4, Sprint and T-Mobile pushed out the press releases announcing the end of their merger negotiations. Dan, I feel like on this show, we've talked several times about these long, drawn-out ordeals. We've talked about Viacom, their leadership battle, we've talked about the Bass Pro Shops and Cabela's merger being this long, drawn-out saga. And now, we have this last one here. Can you give us a little bit of an idea of how things progressed in the last few months, how they started up and how they ended?

Dan Kline: There are logical reasons for these companies to get together. You put their subscriber bases together, and it's about equal to either AT&T or Verizon. So it gives them scale. You can lay off a lot of customer service people, a lot of accountants.

Shen: Redundant functions, yeah.

Kline: You don't need two networks. There were also some major drawbacks. I didn't want this deal to happen, because I remember when Sprint bought Nextel, when Nextel was essentially No. 5 in the wireless space. Nextel used a different technology than Sprint. As Sprint and T-Mobile are not on the same network technologies. Your Sprint phone can not become a T-Mobile phone. That was the case with the Nextel phone and the Sprint phone. So you're buying something that's not super easy to integrate. It's not like they can just become Spree Mobile, and all of the sudden it's just one company. [laughs] I got one up on you there, we were talking about how this would be named before the show.

Shen: Spree Mobile is pretty good. I was going to go with T-Sprint, but I like this more.

Kline: There were a lot of operational challenges, but the reality on this is, the best deals are when one company wants out. The Cabela's management knew they weren't coming along with the deal. They were all going to cash out, make some money, go fishing or hunting or whatever it is Cabela's management would do. In this case, SoftBank, which is the parent company of Sprint, wanted to maintain certain rights and control. They were going to give up the CEO post, John Legere would have that, but they still wanted more management than what they were bringing to the table in terms of valuation offered. That becomes a very dicey deal to make.

Shen: To be clear, in terms of the parties that have an interest in these deal negotiations, on one side, with T-Mobile, their majority interest stake is held by Deutsche Telekom, about a 65% ownership stake, I believe. And on the opposite side of the negotiation table, you have Sprint, which is over 80% owned by SoftBank and the billionaire Masayoshi Son. He's been a big part of the direction, the vision for Sprint, these various efforts. He actually tried to have Sprint take over T-Mobile back in 2014 --

Kline: When it might have made sense for Sprint. They were still No. 3, they were the bigger company.

Shen: And that deal fell through, because the indication, I believe, that they received from the regulatory body that would overlook and scrutinize the deal was, "This is not going to happen."

Kline: They flat out said, "We will not accept any deal that takes the U.S. market from four providers to three providers."

Shen: In this case, we have a new administration now, obviously, and I believe that both parties thought they had a situation where regulators might be more friendly to a deal of this nature. Whether that's the case, again, you're going from four to three major players --

Kline: I think the argument they were going to make is that Comcast and Charter are all somewhat in this, or going into this space, with their own wifi-based MVNO networks, which are networks that don't own their spectrum, they lease it from one of the remaining companies.

Shen: Essentially piggybacking off of the companies that have actually developed the infrastructure.

Kline: Yeah. And I think they were going to give caveats that they would license their spectrum to X amount of payers. They were going to argue that there were legitimately more choices for Americans than the three or four or whatever you want to call it. I don't know that that would have flown. But I do think the reality is, there were a lot of reasons this deal shouldn't happen, and once it wasn't quick, I think you knew it wasn't going to happen.

Shen: Then, you mentioned this too, in terms of what the combined entity would look like, 130 million customers, pretty much on par with AT&T and Verizon. They'd have about $75 billion in annual revenue. Definitely a much more formidable player.

Kline: The cost savings would be extraordinary.

Shen: But the integrations, as you said, would not nearly be that simple or that seamless. And if you're a customer with either Sprint or T-Mobile and this deal had come together, it wouldn't have been so quick for you to see improvements in your service, and that just comes from the challenge of combining two huge national networks, but they're on different LTE technology.

Kline: Because there are no contracts anymore, I think there's a very big risk, and I think we saw this with Frontier Communications, which spent $11 billion buying customers from Verizon, and when it didn't very quickly work well, they didn't get billed right, their service didn't work, their internet wasn't good, whatever it was, they just went, "Oh, I'm going to go to Comcast." It's easier to switch your wireless phone than it is to switch your cable service. No one has to come to your house. You can just walk into a Sprint store and they'll give you a bag to mail it back to T-Mobile. It's very simple.

So you could have spent, whatever it is in terms of stock, billions and billions of dollars, to take Sprint's 50 million customers, it's a little bit more than that, but the 71 million at T-Mobile, and you could lose 10% in the first three months. And I think that's what would have happened. Everybody's prices are too close together. You would also have to deal with, the pricing structures are different at Sprint and T-Mobile. Are they all going to go to one? Are they going to stay two separate brands? That doesn't make sense from a pricing perspective. So to me, it always made more sense for either of these brands to partner with a cable company or someone else in an adjacent space.