Sprint's Hesse: A stronger No. 3 carrier would be better for the industry

Sprint (NYSE: S) CEO Dan Hesse said that, without a stronger No. 3 U.S. wireless carrier, Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T) will continue to gobble up the lion's share of profit in the industry. However, he said that in any hypothetical merger between Sprint and No. 4 player T-Mobile US (NYSE:TMUS), Sprint would have to work hard to convince regulators to approve it.

Click here for video of Hesse's interview.

In an interview Tuesday with Bloomberg TV, Hesse said that a lot of regulators have expressed skepticism about combining No. 3 Sprint with T-Mobile. "Theoretically, if such a transaction were to occur, we would have some convincing to do," he said. Regulators at the FCC and Department of Justice would need to approve such a merger.

Sprint executives met with banks last month to secure debt arrangements for the transaction, according to a recent Bloomberg report. The report, citing unnamed sources, said that Sprint CFO Joe Euteneuer and Treasurer Greg Block met with six banks to get financing in place for when Sprint decides to make a move on T-Mobile. Sprint is expected to make a formal bid in June or July, the report added. T-Mobile has a market capitalization of around $25.6 billion.

Hesse said the industry would be healthier with a stronger No. 3 player. "You'd have healthier competition with a stronger No. 3," he said. "I can't comment specifically on any speculation with respect to M&A, but I think a stronger No. 3 would be better for consumers."

The Sprint chief added: "A stronger No. 3 will get one and two to react more aggressively so everybody benefits. If you are smaller, the big two don't react as significantly or as aggressively."

During T-Mobile's first-quarter earnings conference call last week, held shortly after the release of the Bloomberg report, T-Mobile CEO John Legere reiterated that he is open to industry consolidation. "It's a matter of when, not if" such consolidation takes place, he said.

Legere said there are "multiple ways to play aggressively" and that T-Mobile has said consistently said that "one alternative" is to create a larger player with more scale. "Our scale, our growth, our momentum could benefit from a significant scaling of fixed assets," he said.

The earlier Bloomberg report said Sprint parent SoftBank and T-Mobile parent Deutsche Telekom, which controls around 67 percent of T-Mobile, are still debating who would run the combined company, with Legere seen as the leading candidate.

In the interview Tuesday, Hesse said he would be open to relinquishing control of a combined Sprint and T-Mobile.

Sprint and T-Mobile are at diverging points right now in terms of subscriber trends. Sprint lost 231,000 postpaid customers in the first quarter while T-Mobile gained 1.3 million. Hesse acknowledged in the interview that Sprint is still feeling the effects of replacing and upgrading its 3G CDMA network and adding in LTE as part of its Network Vision project, which Sprit expects to be substantially completed by mid-year. Sprint promised to reverse its subscriber losses in the second half of this year by posting positive net customer adds in the final six months of 2014.

Sprint is also hoping its Spark tri-band LTE service will set it apart from its competitors, though it will take time to roll that out. Some analysts and investors have grown frustrated with the slow pace of the Spark rollout, which started last fall. "It's never fast enough," Hesse said. "But no company has ever had to basically build something this large and complex."

Sprint's LTE network now covers more than 225 million people with LTE and remains on track to cover 250 million by mid-year. As for Spark, which uses 800 MHz, 1900 MHz and 2.5 GHz spectrum, the service is expected to cover 100 million people by year-end. Sprint Spark is now available in a total of 24 markets across the country.

Hesse said that by the end of 2015 Sprint will be able to deliver 150 Mbps of real-world speeds to smartphones. "When we're finished with it (Spark), it's just going to be a phenomenal network," he said.

For more:
- see this Bloomberg TV interview
- see this Bloomberg article

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