Sprint-Softbank, T-Mobile-MetroPCS linkups are not 'gamechangers'

Softbank's planned $20.1 billion investment in Sprint Nextel (NYSE:S) and T-Mobile USA's intended merger with MetroPCS (NYSE:PCS) are "significant transactions," but that does not mean the deals will alter the competitive landscape in the U.S. wireless industry, according to Standard & Poor's Rating Services.

"We do not view them as game-changers for the U.S. industry as a whole," said the firm in its 2013 cable and telecommunications outlook report.

S&P said Sprint's agreement to give up a 70 percent stake in itself in exchange for Softbank's multi-billion-dollar investment resulted from future financing needs rather than efforts to build scale or leverage synergies. Any competitive benefits of the Sprint-Softbank combination, such as cost savings on handsets and network equipment, "would likely take time to emerge, and would likely result from Sprint's greater financial flexibility allowing consistently higher investment in the business," said the firm.

The combination of MetroPCS and T-Mobile is being viewed a bit differently in that it is a merger of rivals, and the combined company could benefit from having larger scale, which would give it greater operating efficiency, better equipment pricing and more spectrum to accommodate an LTE upgrade, said S&P.

"Importantly, however, we also believe the combined MetroPCS-T-Mobile entity would remain competitively disadvantaged against the larger national players, Verizon (NYSE:VZ) and AT&T (NYSE:T), both of which have 'strong' business risks based on their much larger scale and marketing resources, larger base of more profitable postpaid customers, higher average revenue per user, and lower customer churn," said S&P.

The ratings company said the transition to LTE will likely increase the scale intensity and capital intensity of the wireless industry and potentially extend the performance and profitability gap between market leaders AT&T and Verizon and their rivals.

Meanwhile, rumors indicating Sprint might make a bid for MetroPCS before the latter's deal with T-Mobile closes in the first half of 2012 were somewhat shot down by MetroPCS CEO Roger Linquist this week.

Speaking on the sidelines of a UBS conference in New York, Linquist observed that Sprint is tied up with the Softbank deal right now. Linquist, who was quoted by the Wall Street Journal, expressed frustration with investor focus on the possibility that "the interloper," meaning Sprint, might make an offer for MetroPCS.

However, he also said a "roll-up of the industry," including the eventual merger of T-Mobile and Sprint, will likely occur. "It has to happen at some point," Linquist said.

More M&A activity between operators will likely occur down the road because successful mobile operators will be forced to make exorbitant investments in an intensely competitive mobile market that has static margins.

Looking at the global mobile market, S&P said: "Our anticipation is that growth in mobile broadband will offset declining voice and text revenue but not spur margin expansion, on the whole, because of the high investments required, rising handset subsidies, and intense competition in many markets. Those players who under-invest in networks or spectrum will likely be at a significant disadvantage, in our view, and could rapidly lose market share."

For more:
- see this S&P report (PDF)
- see this Wall Street Journal article (sub. req.)

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