T-Mobile's (TMUS 0.88%) rising momentum and impressive subscriber growth have made it an acquisition target.
The company was almost purchased by AT&T in 2011, in a deal that was blocked by the Federal Communications Commission and other federal regulators. More recently, the parent company of No. 3 U.S. wireless provider Sprint (S +0.00%) was so close to a deal with T-Mobile, the No. 4 carrier, that most expected it to be attempted despite FCC Chairman Tom Wheeler publicly opposing the idea. "Four national wireless providers are good for American consumers," said Wheeler, The New York Times reported.
Now the company reportedly is in line to receive an increased offer from France's Iliad SA and Bloomberg is reporting that DISH Network (DISH +0.00%) has met with Deutsche Telekom AG (DTEGF 0.80%), which owns a majority stake in T-Mobile, to discuss parameters for a possible offer.
It's easy to see why T-Mobile would be an attractive asset for an acquirer, but it's becoming harder to see how T-Mobile would benefit from a deal when it seems to be doing just fine on its own.
Why a merger would help
Merging with AT&T would have simply made the strong stronger while a combination with Sprint made a lot of sense for both companies as combining the No. 3 and No. 4 carriers would have given the new entity the heft to take on its much bigger rivals while greatly minimizing cost-per-customer in relation to infrastructure spending, customer support, billing, and marketing.
There was a logic to both deals, especially when you consider that T-Mobile was a struggling company when the AT&T buyout was proposed and it had not cemented its turnaround when the Sprint talks began. Now, however, the company has added over 1 million customers for each of the last five quarters, turned losses into profits, and generally gone from struggling to thriving largely due to its bold CEO, John Legere.
"We have completely reversed T-Mobile's trajectory and started a revolution that is changing the rules in wireless," said the never bashful Legere in the company's most recent earnings release.
That's true, which certainly lessens the pressure on T-Mobile to make a deal, and neither an Iliad deal nor a DISH one offers the same advantages of the previous failed offers. Illiad is in the wireless space, but not in the United States, so the two companies would not be able to share expenses in the way Sprint and T-Mobile could have. DISH is not in the wireless market at all, but its pay TV product could be bundled with T-Mobile's wireless service making the two compatible, in a sense.
It's hard to see how an Illiad deal, which would be funded by private equity, according to Bloomberg, would add anything besides debt to the combined company. According to Bloomberg, Iliad offered about $15 billion for a 56.6% stake in T-Mobile, which Deutsche Telekom rejected, and sources indicated Iliad was seeking a partner to make a higher bid.
A DISH merger would open up some marketing opportunities and allow for the combination of back-end functions like customer service and billing. Of the two, a DISH deal makes a lot more sense if DISH makes a comparable offer.
T-Mobile CEO John Legere has led his company to sustained subscriber growth. Source: T-Mobile
Why any merger is risky
The recent history of mergers within the wireless space shows us that sometimes two companies can be put together and come out lesser for it. Sprint purchased the then-hot Nextel, which had built a following with its push-to-talk walkie talkie functionality, in 2005 and then took a $30 billion writedown -- essentially the entire value of Nextel's stock in 2008, The Wall Street Journal reported. On paper the Nextel deal made sense -- for similar reasons as to why a T-Mobile deal did. In reality, combining the two companies to realize the anticipated savings resulted in Nextel losing its identity, its customers, and ultimately going away.
It's no longer a question of need
T-Mobile is succeeding because Legere has positioned the company as an agitator -- a brand willing to call foul on its whole industry. With its Un-Carrier campaign and Legere's Twitter bravado, the carrier has grown by building a carefully crafted maverick mystique. Lower prices and more transparency than its competitors have helped, too, but largely the company's success comes from the brand perception it has created.
It's hard to see how being purchased by a French company unknown to Americans would benefit the company's long-term growth opportunity or fit in with that carefully tailored image.
A DISH deal makes more sense as the two brands have somewhat similar price propositions in their respective fields. Satellite television in general is a lower price rival to cable. The fact that DISH, like many other companies, is preparing a pay TV service, which would be purely digital not requiring a cable subscription, fits nicely with the Un-Carrier branding.
Of course, a deal only makes sense if Legere runs the combined company, as his presence would not only keep T-Mobile subscribers on board, but might get a decent amount of them to sample DISH.
T-Mobile no longer needs a deal, but the right one under the right terms could make the company stronger and extend its Un-Carrier model to another market.
