In a move that indicates the proposed merger of T-Mobile and Sprint assets is indeed in the final stretch, Bloomberg reported Monday that the two companies are considering possible concessions for the deal, including the potential sale of prepaid properties.
Citing people familiar with the situation, the Bloomberg story said the separation and potential sale of the prepaid businesses appeared to be more attractive than other options, such as selling spectrum licenses or setting up a fourth carrier through a network-leasing arrangement, to earn regulatory approval and save the $26.5 billion deal.
Concerns about the prepaid segment have been attached to the deal since it was announced. Last year, the National Wireless Independent Dealer Association (NWIDA) joined Peter Adderton, founder and former CEO of Boost Mobile USA, to sound the horn about the proposed transaction as structured. Adderton founded Boost in Australia in 2000, and has been actively voicing his concerns about the merger and its effect on prepaid brands.
If the merger is approved without wholesale pricing protections in place, the fear is that MVNOs will see wholesale prices rise, leading many to lose money or close altogether.
In response to yesterday’s Bloomberg report, Wells Fargo Securities analysts said in a note to investors that it was not too surprising, as they expected that the T-Mobile/Sprint team would need to provide some structural remedies to close the deal.
Given the high penetration in the prepaid space with a combined deal—greater than 40%, which would make it the largest player—“we have long known prepaid market concentration would be an area of focus for regulators,” the analysts wrote. “However, we would be surprised if TMUS (T-Mobile US) would separate itself from MetroPCS,” which has been a very strong asset and key pillar in T-Mobile’s strategic direction since it was acquired in 2013.
“In our view, it is more likely that TMUS would be willing to divest Sprint’s prepaid businesses, such as Boost Mobile and/or Virgin. By divesting these assets, TMUS and S (Sprint) could argue they are synthetically creating a new national carrier,” the Wells Fargo analysts added. “Whatever concessions are offered will likely need to meet TMUS’s $7B NPV test. (i.e. TMUS not compelled to accept remedies that result in a loss of $7B or greater of combined entity value on an NPV (net present value) basis.)”
New Street Research policy analysts have been expecting an offer from the companies since the Wall Street Journal reported that the deal was unlikely to be approved “as currently structured.” The analysts have noted several times that a lot rides on whether the U.S. Department of Justice (DoJ) wants a new structure to reflect the narrow problem of increased concentration in the prepaid market, or the broader problem of increased concentration in the overall mobile wireless telecom market (going from four to three players, for example.)
The New Street policy team, led by Blair Levin, suggested the news could represent any one of three scenarios: a response to a clear government signal; a miscommunication; or an opening gambit for a bigger negotiation. He noted that threading the needle between what the DoJ will accept and what T-Mobile is willing to concede may still prove very challenging, and he's not convinced that a prepaid divestiture will get it done.
However, the analysts agree the news suggests the deal truly is in the final inning. “If this story is indeed correct, it would suggest that the parties are at ‘crunch time’ with concessions being discussed,” wrote Wells Fargo analysts. “TMUS and S currently have a deadline of July 29th to win regulatory approval.”