Editor's Corner—Sprint struggles to find a date to the M&A party

Cell phones and millennials
Sprint said it's been in M&A talks with multiple companies
Colin Gibbs Editor's Corner

For all the talk of a flurry of M&A activity in the wireless industry, no significant new deals have been announced since the FCC lifted its so-called “quiet period” following the wrap-up of the incentive auction in April.

But Sprint seems to be having a hard time finding a date to the M&A party.

The nation’s smallest wireless carrier watched its shares soar Tuesday after posting its first quarterly profit in three years, adding 88,000 net postpaid subs. The good news came just days after a rough stretch, though, during which both Comcast and Charter appeared to rebuff Sprint’s advances.

‘Wireless… that’s a tough business’

Charter said publicly on Sunday that it had “no interest in acquiring Sprint”—an offer that Sprint CEO was never on the table in the first place—while Comcast CEO Brian Roberts suggested last Thursday that a Sprint tie-up wouldn’t necessarily advance his company’s wireless pursuits enough to justify a deal.

“No disrespect to wireless, but that’s a tough business,” Roberts said on Comcast’s second-quarter earnings call Thursday, pointing to the early progress of its MVNO with Verizon. “We like what we’re doing with Xfinity Mobile. It really improves what we hope it will improve. It will be a long road, and I don’t see anything in the industry where we envy a position we don’t have today.”

The comments from Charter and Comcast don’t definitively rule out any potential deal with Sprint, of course. But they unquestionably signal a lack of interest from the cable companies that have been at the heart of many reports of potential Sprint partners in recent weeks.

“The management teams of Comcast and Charter were both quite clear on their earnings calls last week that they had little interest in owning wireless,” Walter Piecyk of BTIG Research observed in a blog post. “A month ago, we asked, ‘Is Sprint the Answer to the Cable Industry’s Wireless Question?’ Apparently, that answer is ‘No.’”

Spectrum-rich but cash-poor

Sprint CEO Marcelo Claure insisted Tuesday that Sprint remains a viable standalone carrier, but the veracity of that claim isn’t really clear. The carrier has impressively closed the network gap with its bigger rivals, but tests from third-party network-measurement companies still generally find Sprint lacking in terms of coverage and data speeds. Sprint has begun to deploy services using its extremely valuable pile of 2.5 GHz airwaves, but it will almost surely need a cash infusion from somewhere to keep pace with the competition.

Meanwhile, Sprint has a massive amount of debt, much of which will come due over the next several years. Sprint reportedly carries roughly $41 billion in gross debt, and Reuters reported that Sprint ended its fiscal year in April with a total debt-to-equity ratio of 196.43%, far higher than the industry average of 133.20%. SoftBank spent more than $20 billion to acquire Sprint in 2012, and investors may not warm to the idea of pouring more money into the U.S. operator—particularly considering Sprint’s value has increased substantially over the last 18 months.

And Claure made no secret of the fact that Sprint is eagerly pursuing arrangements with both existing carriers and those outside wireless looking to enter the market. “I can tell you that today we have plenty of options,” he said. “We’ve had conversations with several parties, and soon we’ll start making decisions.”

It increasingly appears as if a cable operator won’t play a role in any significant arrangement, though.

T-Mobile: Still attractive, but maybe unattainable

Claure said that hypothetically, at least a merger with an existing wireless carrier remains the most attractive option – and T-Mobile is the obvious candidate here. Such an arrangement would enable a combined carrier to minimize its capex and R&D costs, among other things, and it would result in a market of three major U.S. carriers with roughly similar market shares.

“A potential merger with a company that’s in the same industry as we are” would be optimal, Claure observed. “You first look at the synergies; they’re significant.”

But that scenario faces some substantial challenges as well. It isn’t at all clear that a Sprint/T-Mobile merger would gain the approval of federal regulators who have balked at any move that would consolidate the number of major players from four to three. The economics of that tie-up are also difficult: T-Mobile is doing very well on its own, thank you, and isn’t likely to pay a premium for an entire carrier (including debt) when its primary objective is to get its hands on 2.5 GHz airwaves. Similarly, SoftBank’s already high leverage could preclude it from making an acceptable offer for T-Mobile, as MoffettNathanson analysts wrote in December.

Can Sprint go it alone—for now, at least?

Claure’s optimism that Sprint will strike a deal with at least one other company is convincing, and as the telecom, cable and media industries collide, there is no shortage of plausible scenarios—indeed, one recent report has Sprint joining forces with Dish Network. But Sprint’s leverage may already have waned slightly with the recent comments from both Comcast and Charter, and the clock is ticking for the carrier to make a crucial decision in a market that could change very quickly through M&A.

I think T-Mobile has re-emerged as Sprint’s most attractive potential dance partner, but I’m not at all convinced the two carriers can come to terms. And even if they can, the proposed marriage may not pass regulatory muster. So I think there’s a reasonable chance Sprint opts to go it alone—for now, at least—and tap SoftBank’s deep pockets to help continue to upgrade its network in advance of 5G. But that possibility exists only if Masayoshi Son will agree to it. — Colin | @colin_gibbs