Sprint (NYSE:S) is considering a bid for No. 4 carrier T-Mobile US (NYSE:TMUS), according to a Wall Street Journal report. Sprint is studying potential regulatory concerns of the deal, and it might make an offer in the first half of next year.
The report, which cited unnamed sources, said the deal could be worth more than $20 billion, depending on how large a stake in T-Mobile that Sprint tries to buy. The report also noted that Sprint hasn't yet decided whether to go ahead with a bid, which could be highly risky, especially if antitrust regulators at the Department of Justice balk at the deal.
Sprint declined to comment and representatives from T-Mobile did not immediately respond to requests for comment.
Japanese operator SoftBank has acquired 80 percent of Sprint via a deal that was finalized in July, around the same time Sprint acquired partner Clearwire. The new WSJ report said SoftBank CEO Masayoshi Son is driving the idea of a Sprint/T-Mobile deal. T-Mobile completed its own merger with prepaid player MetroPCS in May and has been operating as a publicly traded company since then, though Deutsche Telekom still owns 67 percent of the company.
Further, AT&T (NYSE:T) is pursuing a deal to acquire smaller prepaid player Leap Wireless (NASDAQ:LEAP), a deal AT&T expects to close early next year.
The DOJ blocked AT&T's proposed 2011 acquisition of T-Mobile, arguing U.S. consumers would be hurt by moving from four national operators to three. Analysts say that the Obama administration has likely not changed its stance on that issue. T-Mobile, which has spent the intervening years acquiring spectrum and building its LTE network, does not want to waste more time on a deal that may fall apart, the report said. Additionally, T-Mobile has spent this year carving out a distinct identity under CEO John Legere as the "uncarrier," and merging with another operator would seem to fly in the face of that strategy. The strategy seems to be working as well--T-Mobile added 2.1 million total customers in the second and third quarter alone.
Any Sprint/T-Mobile deal would face numerous complications from both technological and regulatory perspectives. First, Sprint is in the middle of a complex network buildout and just committed to a nationwide deployment of its 2.5 GHz spectrum to augment its LTE service. That will be a massive undertaking on its own without having to deal with another merger.
Further, the two companies operate on different spectrum bands and technologies for their networks and devices. T-Mobile uses 1700 MHz AWS spectrum for its LTE network and 1900 MHz PCS spectrum for HSPA+ services, while Sprint supports LTE on 800 MHz, 1900 MHz and 2.5 GHz and CDMA services on 800 MHz and 1900 MHz. Sprint is still getting out from under its disastrous merger with Nextel, is working to finish its Network Vision network modernization and likely does not relish the idea of more complicated network technology integrations.
"There could have been significant savings if they had entered into a merger much earlier in the Network Vision process and before TMUS started their LTE deployment; however, we think both deployments are too far along at this point," New Street Research analyst Jonathan Chaplin wrote in a research note. "Sprint has serious work to do on their network throughout 2015; we think it would be easier, from an integration perspective, to time closing of a deal in 2016 or later, when Network Vision is substantially complete."
All that said, Sprint and T-Mobile executives have voiced support for a merger in the past few months, especially to compete more effectively with larger rivals AT&T and Verizon Wireless (NYSE:VZ).
Indeed, Sprint CEO Dan Hesse said at a UBS investor conference on Dec. 10: "I believe that the right thing for the industry, as I have said before, over the long term, is I think some consolidation would make for a healthier market over the long term, that number one and two are awfully large in terms of their market position and market power, but we have--it's hard for me to speculate," he said, according to a Seeking Alpha transcript.
Hesse also noted that there is a new FCC Chairman, Tom Wheeler, which could change the regulatory environment for mergers. However, Chaplin wrote that the regulators are unlikely to bless a major wireless merger before the auctions of AWS-3 spectrum in late 2014 or early 2015, and the incentive auctions of 600 MHz broadcast TV spectrum in mid-2015.
"Sprint is well aware of both sets of challenges. If they attempt a deal now, we believe it would be driven by the realization that Network Vision will take a long time to deliver results and, in the meantime, TMUS is making their path to recovery more difficult," Chaplin added. "TMUS has done an outstanding job of establishing themselves as the anti-carrier. Sprint will have to find a different value proposition. They will have one in a couple of years when their 2.5 GHz spectrum is deployed; however, this will take...well, a couple of years. The companies may also want to complete a deal now ahead of the auctions so that they can deploy resources more efficiently (however, the FCC will want just the opposite)."
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