How Persistence Might Finally Pay Off for Sprint and T-Mobile

Sprint (S) and T-Mobile (TMUS 0.57%) have finally agreed to merge after years of discussions. The two companies announced a $26 billion deal that will see T-Mobile CEO John Legere running the combined entity.

On this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel Kline as they break down the history of merger talks between the two companies. They look at why previous deal negotiations fell apart, including how the company's bargaining positions have changed in the lead up to the recent announcement.

A full transcript follows the video.

This video was recorded on May 1, 2018.

Vincent Shen: Today, we're going to spend some time talking about Sprint and T-Mobile, which have agreed to a $26 billion merger that will put them in the ring with regulators for the second time in less than a decade. Joining me today inside the Fool HQ studio to discuss the deal is Motley Fool contributor, Dan Kline. Great to have you back, Dan!

Dan Kline: Thanks, Vince! So we've been talking, I'd say, for the past two or three years -- we usually bounce back and forth a list. It's not always obvious what the show should be about. And I would say, almost every one of those has ended "unless T-Mobile and Sprint agree to merge." It's become almost like a running joke in terms of, "This is going to happen at some point, so it's our backup show." So it's almost nice to just no longer have to think about it.

Shen: To have a deal on the table, it's really nice for them to officially announce something, and something that we can really deep dive on, provide a lot of specifics in terms of what the combined entity will look like, some of the financials, and some of the arguments that Legere and his crew essentially make about why this deal makes sense. But I have to imagine that, when you first saw this news, your ears really perked up, because you messaged me over the weekend, and it was kind of a surprise for them to announce it early on Sunday.

Kline: I literally had made a note to ask you and our various bosses about whether I should write the story in case it happens, so we'd have it ready to go. As I was making a note to do that, I saw it come across the transom and of course realized, "Oh God, it's the weekend, we don't have anything set up to deal with this in terms of stories." Look, I thought there were a lot of reasons that this still might not happen. We'll get into some of the regulatory concerns. But I really thought ego was going to stop this deal from happening.

Shen: Yeah, absolutely. And that did come up a few months ago, and we'll get into that. Let's take a few minutes here to just go over the history of merger attempts between the two companies before we get into the details of their recent announcement. Dan, please feel free to chime in with extra details as we walk through this saga.

After that, just so listeners know what to expect, we'll look at how the two companies are packaging and marketing this deal to make it look attractive to consumers, investors, and regulators. And then, to wrap up, we'll share some of our final thoughts on the merger and some of the precedents that we've seen in terms of the regulatory environment.

So, if we rewind, it's 2014. Sprint and T-Mobile are the No. 3 and No. 4 wireless carriers, respectively. Masayoshi Son, he's the head of the Japanese conglomerate SoftBank (SFTB.Y 0.93%), and they've only recently, I think in the past year or so, acquired a majority ownership stake in Sprint. Masayoshi Son has big hopes of shaking up the U.S. wireless industry.

Kline: And at the time, T-Mobile was the lost cause.

Shen: Yes, exactly. On the flip side, Deutsche Telekom (DTEGY 0.09%), the parent of T-Mobile, they're looking to sell off the U.S. business. That year, Sprint announces a $30 billion-plus deal to take over T-Mobile and to present a more formidable third place challenger to Verizon (VZ -0.53%) and AT&T (T 1.88%). That theme, as we'll see with the latest deal announcement, does not change.

But those plans are ultimately derailed when regulators step in with very, very strong objections to the deal, and SoftBank is essentially forced to accept that they won't be able to overcome the antitrust challenges. Deal goes away.

Kline: It wasn't theoretical. It wasn't: "We might oppose this," or "There might be major conditions." Basically, the Obama administration had made it very clear that anything that took the industry from four players to three players wasn't going to fly.

Shen: Exactly. I'll note here, in terms of some of the players, that John Legere had already been the CEO at T-Mobile for over a year during those 2014 deal discussions, but at Sprint, soon after it gave up on that merger because of the objections from President Obama's administration, Marcelo Claure took over soon after that as CEO. And both Legere and Claure serve in those roles today.

Fast forward three years -- now, it's late 2017. We had a show where we talked about this. Again, the two companies are doing their little dance negotiating a merger. This time, though, there's been a reversal of those original 2014 deal talks, because T-Mobile is now in a much stronger bargaining position, because in just that approximately three, four-year time period, T-Mobile has enjoyed steady profitability growth, they've added, I think, almost 20 million subscriber additions, and that put it in the No. 3 position.

Kline: A million customers a quarter for over four years at this point.

Shen: Very solid string of results for them. Meanwhile, Sprint, they're struggling still. They've fallen to No. 4. But the company is starting to bounce back. They've implemented some pretty strong cost-cutting initiatives. They're putting out much more aggressive plan offerings to attract subscribers.

Kline: They sort of took a page out of the T-Mobile playbook. They did a couple of interesting things. Yes, they heavily discounted as a way to get people to switch. And they moved to a marketing campaign with Paul, the former Verizon "Can you hear me now?" guy. And their entire promotion basically said, "Yes, we have the worst network, but all networks are pretty good, so ours is good enough." Which is actually mostly true, as a former Sprint customer, so it was kind of a smart tactic. And you know Dylan Lewis, another one of the IF hosts, is with Sprint now, because he got offered a plan that was something like $1 a month. I might be overstating it. So Sprint was super aggressive in getting you to sign up with the idea that you'd get it and you'd be like, "OK, this is good enough. It's still cheaper when I'm not on the special offer, I'll stick around."

Shen: And correct me if I'm wrong, they were also one of the early providers to really push the truly unlimited plans that have kind of become standard now across the major four carriers.

Kline: Sprint and T-Mobile were certainly the first. T-Mobile was the first to go all unlimited, but Sprint has always had it. It was a reason I was a Sprint customer for so long. Not that I even use that much data, I just didn't want to have to think about it across my wife and my son and myself. So yeah, they were absolutely aggressive, and they did stabilize and move back to a growth position. It was just a very untenable position when you looked at long-term investment.

Shen: Yeah. So management at both companies right now has to be feeling more optimistic about their odds with antitrust regulators under President Trump's Administration. But back in 2017, in November, those discussions also ended up falling apart.

We covered those developments in detail on an Industry Focus episode around that time. In that case, the core disagreement was actually among the companies themselves and their management teams. This is what you mentioned, in terms of some of the ego, where Masayoshi Son and SoftBank were unwilling to give up strategic control of the combined entity, given that they saw a very long-term opportunity for wireless companies due to the Internet of Things and the ongoing need for connection between various devices, and a lot of potential financial opportunity there, and they were leery of giving that up.

Kline: They wanted control, but it's important to note, they lost all leverage in terms of being able to force control. They were the less successful company. And I'll give Marcelo Claure all the credit in the world, but no one is picking him over John Legere when you have to take on AT&T and Verizon. Legere literally wrote the playbook for this. So you weren't going to have a situation where SoftBank was going to be in charge.

The negative of that for SoftBank is, you have all of this wireless spectrum and this stuff being used right now to deliver telephone service that has, in theory, the ability to do, as you mentioned, Internet of Things, cable, who knows what else. And that's something SoftBank has pledged to spend, I want to say, $100 billion in the U.S. in the next five or six years on. So probably, as part of this, there's some quiet agreement to work, at least discuss, those plans.

But, this deal actually happened, and the question was asked in the call between the two, when actually, Marcelo Claure and John Legere brought this back, they were talking about working together on 5G or possibly the roaming deal that's part of this in the interim phase, where Sprint customers can roam on the T-Mobile network. As those discussions started happening between these two usually adversarial CEOs, they came back to the idea of, "This makes no sense, we should merge."