Reports surfaced last week that Sprint and T-Mobile had returned to the negotiating table, just a few months after their latest round of talks collapsed in November.
The news raises the obvious question: What happened? Why are executives from Sprint and its parent company SoftBank, and T-Mobile and its parent company Deutsche Telekom, returning to merger discussions so soon?
Some believe it was SoftBank’s Masayoshi Son who had a change of heart. Indeed, it was his demands to retain control over a combined Sprint and T-Mobile that reportedly scuttled the deal in November.
“Press reports (FT, Reuters) indicate SoftBank may have initiated this current round of discussions, in light of a more challenging standalone path for Sprint (higher capex, FCF burn near-term),” wrote the analysts at Wall Street analyst firm Deutsche Bank Research. “Given this, some investors have noted Softbank may be more willing to cede control in a deal (our model implies this), given (a) the desire to finally get a deal done (and achieve meaningful synergies) ahead of upcoming spectrum auctions (anti-collusion rules), (b) a potentially tougher regulatory backdrop.”
The analysts also pointed to recent commentary from SoftBank’s management that appeared to indicate a desire by the company to obtain smaller, less risky stakes in its investments. The analysts said SoftBank may prefer to own 20%-30% stakes in companies in key industries across the globe, and a Sprint-T-Mobile merger would give SoftBank a 27% stake in what would be the third-largest wireless operator in the United States.
Other analysts appeared to largely agree with that assessment, arguing that SoftBank’s CEO cannot hope to retain control over a merged company considering T-Mobile’s continued momentum in the U.S. wireless market. “We view SoftBank's prior desire for control is a nonstarter given continued momentum in T-Mobile's operations and its strategic importance to Deutsche Telekom's overall business,” wrote the analysts at Barclays.
Others, however, disagreed.
“Separating the emotion from it, does it pass the smell test that S [Sprint] would have entered into 2 tower deals, a fiber deal (we believe with Zayo—neither co. commenting), raised $5B, and have a parent company who just raised just under $10B (with Alibaba stock as collateral), then turn around and sell and agree to give up control? Not really to us,” noted the analysts from Wells Fargo. They pointed out that Sprint, in the months since merger talks ended, has been working to improve its wireless network in part by embarking on a significant deployment of 5G technology over Sprint’s vast 2.5 GHz spectrum holdings.
Added the Wells Fargo analysts: “In fact, since last November we believe the value of that 2.5GHz spectrum has only increased—not decreased—as more of the 5G ecosystem seems to be evolving over the high band world. Pay attention to all the discussion surrounding all the CBRS (3.5Ghz) spectrum. If the press is correct and there are many interested parties here (VZ, cable, TMUS, Google, etc)—2.5 GHz becomes a bigger part of the conversation and, perhaps, the canopy layer in a 5G world.”
Finally, other analysts said it’s simply too difficult to guess what’s really going on.
“The reality is that we have no way of knowing,” explained the analysts with New Street Research. “We have been entertained by the strongly held views we heard from clients last week regarding who has the upper hand in the negotiations this time. We were reminded of the quote that appears at the beginning of ‘The Big Short’ (that was attributed to Mark Twain, though perhaps mistakenly): ‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’”