By Drew FitzGerald, Dana Cimilluca and Dana Mattioli
The boards of Sprint Corp. and T-Mobile US Inc. have agreed to
an all-stock merger that, if allowed by antitrust enforcers, would
leave the U.S. wireless market dominated by three national
players.
It is the third time in recent years that the two rivals have
attempted the combination.
New technology, stiff competition from wireless rivals and an
aging cellphone sector keep driving Sprint and T-Mobile into each
other's arms. Both companies hope to squeeze billions in savings by
uniting operations despite their owners' different management
styles and a tough regulatory environment.
The all-stock deal would combine Sprint, which has a market
value of $26 billion, with T-Mobile, which has a market value of
$55 billion, based on Friday's closing prices. The two companies
also have about $60 billion of combined debt.
Joining forces would create a wireless provider with nearly 100
million cellphone customers, second only in the U.S. to Verizon
Communications Inc. The combined company would be controlled by
T-Mobile parent Deutsche Telekom AG and run by T-Mobile CEO John
Legere.
The companies will still face an uphill battle in Washington.
The Republican administration hasn't been consistently receptive to
big corporate mergers. The Justice Department sued AT&T Inc. in
November to block its $85 billion takeover of Time Warner Inc., and
lawyers for the two sides are making closing arguments on
Monday.
In a reflection of the risk that authorities would block an
attempt at combining the nation's third- and fourth-largest
wireless carriers, the Sprint-T-Mobile deal isn't expected to
include a breakup fee that one side would owe should regulators
block a proposed tie-up, the people familiar with the matter
said.
The government also has a past victory under its belt: It forced
AT&T Inc. and T-Mobile to abandon a planned tie-up in 2011.
In 2014, the then head of the Federal Communications Commission
made clear that having four national providers was necessary to
ensure competition and lower prices for consumers. That forced
Sprint and T-Mobile to abandon their plans to combine. The current
FCC chairman, Republican Ajit Pai, hasn't drawn the same line about
the number of national providers.
Sprint and T-Mobile executives could make the case that times
have changed. Investments in 5G infrastructure could blur the lines
between cellphone provider, cable company and technology firm. Even
using current technologies, Comcast Corp. has rolled out low-cost
wireless service to its cable customers that rides on Verizon's
network.
Dish Network Corp., led by its chairman Charlie Ergen, meanwhile
is building a bare-bones wireless network that could be used to
link autonomous cars, drones and other machines aside from
cellphones. Companies could use that project to argue there are
more than four nationwide wireless companies, though it would be a
harder sell if Dish avoids directly competing with Sprint and
T-Mobile.
"Charlie alone can change the prospects of this deal," said
Blair Levin, a regulatory analyst for New Street Research LLC.
Last year, Sprint and T-Mobile discussed a deal but the talks
collapsed in November after they failed to agree on who would
control the combined company, people familiar with the matter said.
Japanese technology giant SoftBank Group Corp. owns nearly 85% of
Sprint. Germany's Deutsche Telekom owns about two-thirds of
T-Mobile.
SoftBank founder Masayoshi Son, whose firm SoftBank took control
of Sprint for $22 billion in 2013, was reluctant to give up control
of Sprint last year. One person close to Mr. Son said the pressure
on Sprint to roll out 5G technology made him more amenable to
relinquishing some control.
Mr. Son will join the board of the combined company but the
board's chairman will be Deutsche Telekom CEO Tim Höttges. Sprint
CEO Marcelo Claure will also join the combined board.
Shares of Sprint have gained 25% since The Wall Street Journal
reported on April 10 that the two sides had rekindled talks.
Wireless executives have long complained there are fewer ways to
grow profits now that nearly every American adult -- and many of
their children -- owns a smartphone. They hold on to those devices
for longer, cutting into equipment sales. All four top carriers now
offer plans that promise unlimited data, making it harder for them
to show they're different from their rivals.
Even T-Mobile, which adds millions of customers each year mostly
at its rivals' expense, has showed signs that growth is cooling.
The company predicted it would add 2 million to 3 million
subscribers with monthly contracts this year, fewer than in 2017.
Such so-called postpaid subscribers are lucrative because they tend
to spend more each month and switch less often than people on
prepaid plans.
Meanwhile, network engineers say the next-generation 5G
standards could allow wireless companies to serve huge new markets,
from home internet service still dominated by cable companies to
autonomous cars just now being developed.
But rolling out 5G services will require heavy investment in
cellular spectrum and installing hundreds of thousands of antennas
around the country, which gave new impetus to Sprint and T-Mobile
executives to decide whether they will be going it alone or
together.
AT&T said it would devote at least $23 billion to capital
spending this year, excluding some investments in a new
public-safety network. Verizon said it plans to spend at least $17
billion on capital expenditures in 2018. Both budgets are well
ahead of Sprint and T-Mobile, which each spend under $10 billion a
year on construction, electronics and the like.
Left alone, the spending gap will only widen as companies rush
to install 5G equipment. "You can't win a race by having half the
horses," said Roger Entner, an analyst for telecom consultant Recon
Analytics Inc.
Winning the race wouldn't come cheap. Consulting firm Accenture
estimates that U.S. telecom companies together could invest $275
billion over the next seven years to deploy the next-generation
wireless technology.
No wireless company has much time to decide. The FCC will launch
two new auctions for wireless spectrum licenses at the end of this
year, forcing the companies to decide how they want to spend
billions of dollars. Federal rules also require bidders to halt
talks before the auctions to avoid coordinated bidding.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com, Dana
Cimilluca at dana.cimilluca@wsj.com and Dana Mattioli at
dana.mattioli@wsj.com
(END) Dow Jones Newswires
April 29, 2018 13:00 ET (17:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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