T-Mobile cites Sprint’s ‘huge debt load’ in arguments for merger

T-Mobile
T-Mobile argues that the merger will enable the new company to deliver the nation’s first robust, nationwide 5G service. (T-Mobile)

Lawyers representing T-Mobile and Sprint earlier this week responded to allegations from states in the lawsuit trying to block the merger, with T-Mobile arguing the merger will increase competition, and that Sprint is not likely to “play a meaningful competitive role as a standalone company in the years to come.”

Sprint has been steadily losing subscribers, its free cash flow has been “overwhelmingly negative,” its market share has steadily declined since 2013 and it’s struggling with its “huge debt load and interest expense” that in the last year was greater than its operating income, the lawyers for T-Mobile and Deutsche Telekom told the court. “Plaintiffs’ prediction that Sprint would abruptly reverse this long trend and emerge as a vigorous standalone competitor is nothing more than wishful thinking.” Bloomberg reported on the filing earlier this week.

T-Mobile also argued that its opponents “reject engineering and physics realities” that show the combination of Sprint’s and T-Mobile’s spectrum and assets will create “a far better network with much greater capacity at lower cost than either could do separately.”

RELATED: Sprint’s outlook bleak as the carrier posts 128K postpaid phone losses in Q2

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On its own, T-Mobile faces increasing costs to create capacity because of its limited quantity of mid-band spectrum, which allows for deep network coverage. This, in turn, limits its ability to drive lower prices, they argued.

Sprint, on its own, faces coverage gaps because of its lack of low-band spectrum, which allows for broad network coverage. “This, in turn, limits its ability to attract customers,” they wrote. “By combining these spectrum and network assets in a single portfolio and using the right spectrum for the right job, more capacity can be generated at much lower cost. In short, each company provides what the other needs, creating a much more efficient, and therefore more competitive, firm.”

FCC Chairman Ajit Pai earlier this month circulated a draft order to conditionally approve the merger at the same time more parties started calling for an extended public comment period due to the latest proposed changes to the deal.

The U.S. Department of Justice blessed the merger this summer following a settlement that includes conditions for the new T-Mobile to divest prepaid and spectrum assets to Dish Network in an effort to set up the satellite TV provider as a fourth national carrier.

States opposed to the merger, which include at least 16 state attorneys general, have said they have serious concerns about cobbling together that fourth mobile player and they don’t think it will address the merger’s harm to consumers, workers and innovation. The lawsuit, originally filed June 11 in United States District Court for the Southern District of New York, alleges that the merger of two of the four national mobile network operators would harm mobile subscribers nationwide by reducing access to affordable, reliable wireless service and hitting lower-income and minority communities particularly hard. A trial is set to start in December.

In its responses filed Wednesday, T-Mobile argued that the opposition ignores “major players in the wireless marketplace—including cable companies and MVNOs that compete aggressively and have millions of customers—as if they are irrelevant to competition.”

The states also “fail to understand market realities about the changing dynamics of the industry and the innovation that fuels its development, instead relying on a fantasy that competition between T-Mobile and Sprint alone is somehow critical in the 5G world,” they added. “Plaintiffs are dwelling in the past while the rest of the world is building super highways.”

Of course, the new T-Mobile will build that super highway for wireless services. “The combination of Sprint’s and T-Mobile’s complementary assets will dramatically increase capacity of the network – meaning more lanes to carry more wireless traffic for many more customers,” the lawyers wrote.

In a bit of bad news/good news for the companies, Oppenheimer analyst Timothy Horan this week provided an update and commentary on the situation, downgrading T-Mobile’s stock and upgrading Verizon’s. Both Verizon and AT&T will benefit from elevated Sprint churn from a new T-Mobile/Sprint combination, he told investors.

Final approval of a merger could be on hold until the first quarter of 2020 if the state attorneys bring their lawsuit to trial, but there is still a 20% chance of rejection, the analyst said. “We expect VZ/T to aggressively target Sprint subscribers during the transition and, for the near term, TMUS/S trends to look weak. The long-term margin gains will be worth the short-term integration pain.”

The Oppenheimer analyst team also said they think having three, well-capitalized competitors is healthy for the wireless industry. “Dish and cable MVNOs will attempt to build out their own networks, which should offset churn that the towers see from Sprint, but it will take five-plus years for them to have competitive networks. The merger likely speeds up 5G nationwide coverage, negative for cable,” they wrote.

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