Industry Voices—Entner: Putting some context behind the T-Mobile, Sprint merger

merger and acquisition
Sprint and T-Mobile hope to merge. (istocksdaily)

The parents of T-Mobile and Sprint have finally announced their intentions to merge their U.S. operations in a $59 billion deal. It combined the distant third and fourth largest operators to form a competitor of almost the size of AT&T’s and Verizon’s mobile operation, with the potential to supercharge T-Mobile’s unbroken three-year win record of growing faster than the rest of the industry combined. This merger is nothing less than a T-Mobile takeover, considering that T-Mobile shareholders will own two-thirds of the company and the new T-Mobile management is being led by John Legere and Mike Sievert with the new headquarters being at the old T-Mobile headquarters in Bellevue, Washington. The Kansas City co-headquarters will meet the same fate as the Reston co-headquarters did in the Sprint Nextel merger. Give it a year or two and it’s gone.

The merger comes at a time when both AT&T and Verizon are already in a postwireless world looking for growth in the combination of content and digital advertising. The logic for T-Mobile and Sprint to merge is compelling. The cost savings of building one 5G network instead of two are significant. The synergies of streamlining the combined operations and retail presence is going to be another major factor. Investors will focus on all the combined cost savings; antitrust regulators will look at the consequences of the combined cost savings.

Q4 17

Retail Postpaid

Retail Prepaid

Wholesale

Connected Devices

Total

AT&T

77,875

15,335

9,366

38,991

141,567

Verizon

110,854

5,403

22,420

23,600

162,277

Sprint

25,316

11,016

10,524

5,635

52,491

T-Mobile

34,114

19,813

17,215

3,933

75,075

Total

248,159

51,567

59,525

72,159

431,410

           

New
T-Mobile

59,430

30,829

27,739

9,568

127,566

Source: Recon Analytics Inc. Verizon wholesale and connected devices subscriber numbers are estimates.

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The combined T-Mobile/Sprint organization will remain overall third in the wireless market, but it will dominate the carrier prepaid and wholesale markets, where it will have 60% market share and 47% market share, respectively.

 

Retail Postpaid

Retail Prepaid

Wholesale

Connected Devices

Total Market Share

Phone Market Share

AT&T

31%

30%

16%

54%

33%

31%

Verizon

45%

10%

38%

33%

38%

39%

Sprint

10%

21%

18%

8%

12%

12%

T-Mobile

14%

38%

29%

5%

17%

18%

New T-Mobile

24%

60%

47%

13%

30%

30%

Source: Recon Analytics Inc. Verizon wholesale and connected devices market share numbers are estimates

What regulators use as their benchmark if an antitrust review is required is the Herfindahl-Hirschman Index (HHI), which measures market concentration. The HHI of the wireless industry is approximately 2,942, well above what is considered highly concentrated. The merger will increase the HHI by more than 400 points, well above 200 points, which is considered to enhance the market power of the merged company, and thereby triggering a merger review process.

T-Mobile and Sprint are framing their merger as necessary for the United States to achieve 5G leadership. They are right that if the United States loses 5G leadership, millions of jobs are at risk and even more will not be created. The consequences of losing generational leadership are so stark that entire industry sectors in the affected countries disappear. To help the United States achieve global 5G leadership, the new T-Mobile promised to invest $40 billion over the next three years into their network. This represents about a 30% increase compared to the capex run rate that Sprint and T-Mobile had announced previously.

Ultimately, the fate of this merger depends on jobs. Of the proposed $6 billion in savings per year, 93% is opex. At least $2 billion of the opex savings come from sales, marketing, advertising, IT and administrative cost savings, which typically means job losses. If regulators look at the job situation in a narrow way, then it's difficult to see how this merger would create net jobs. The larger you draw the circle of what jobs you count, the easier it is to see that it helps with jobs. 5G will create millions of jobs. The question is who can take credit for it and will regulators give T-Mobile credit for them. It is critical for T-Mobile and Sprint to get the credit for creating these jobs in the overall 5G economy. Otherwise, it is hard to see how regulators will allow a merger that lays off tens of thousands of American workers in order to allow a German and Japanese company to compete better with two American companies. So in the end, this is about jobs.

If the DOJ and the FCC allow the merger, the integration of Sprint into T-Mobile will follow the MetroPCS merger playbook, which was one of the best executed mergers in wireless. The Sprint network and its customers will be merged into the T-Mobile network. The combined entity will take the current 110,000 Sprint and T-Mobile sites and decommission 35,000 of them and fill in 10,000 to fill the gaps, for a net decrease of 25,000 sites. At $3,000 combined rent and backhaul cost per month, the site-decommissioning synergies are roughly $1 billion per year. That will make a dent in the growth trajectory of the tower industry. The network merge is easier and cheaper to achieve than the customer transition onto the T-Mobile network. Paradoxically, the customer migration at MetroPCS was a lot easier due to the high churn at MetroPCS as a prepaid operator. Sprint has less than half the churn MetroPCS had, which will make the natural, and essentially free, customer migration much harder. Forcing customers to get a new handset is both expensive—as the carrier has to buy an equivalent handset—and often leads to customers leaving as they are forced to make a decision. For these reasons, Sprint hesitated so long to turn off the Nextel network. If T-Mobile even gets 75% of Sprint customers to voluntarily migrate, that would still leave 8 million branded customers who either get a new handset or a new carrier that is not called Sprint. The problem also exists for Sprint’s wholesale customer base, but since it is mostly prepaid the problem is smaller. For IoT customers on Sprint’s network who rely on a long, uninterrupted product and network life cycle, the problem is massive. These companies basically need to exchange all of their IoT devices.

At the same time, T-Mobile and Sprint promise to bring 5G to rural America by rolling out 600 MHz spectrum nationwide. This could allow the new T-Mobile to provide an alternative to their current offer from cable companies or rural telecom companies. For an FCC that wants to close the rural-urban digital divide, this is certainly a sweetener they will appreciate.

The combined entity will be a substantially stronger competitor, if only due to the elimination of intercarrier churn. When T-Mobile purchased MetroPCS, it eliminated 40% of the intercarrier churn, which laid the foundation for its growth to a much greater degree than any other factor. While the intercarrier churn between T-Mobile and Sprint is substantially less, the impact nevertheless should be substantial.

In closing, this might be the end of the road for Sprint in a final M&A deal. I remember when Sprint bought Nextel for $32 billion, only to be acquired by Softbank for $22 billion. Subsequently, Softbank paid $18 billion to integrate Clearwire into Sprint, only to be the junior partner in the new T-Mobile being valued at $26 billion. Quite the story.

Roger Entner is the founder and analyst at Recon Analytics. He received an honorary doctor of science degree from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.

"Industry Voices" are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce. 

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