So at last the latest drama in the wild ride that is the US telecoms industry is over, with Softbank gaining its controlling stake in Sprint and Sprint securing full control of Clearwire, both in the teeth of counterbids from Dish. The outcome undoubtedly strengthens the US’s third cellco, and gives it the best chance of disrupting the Verizon/AT&T dominance since it first took its bold, doomed step towards early 4G with WiMAX. But other questions remain unanswered by the closing of the twin deals ‘ what will Dish’s and T-Mobile’s next moves be? Has Sprint done enough to close the gap with the towering Verizon in LTE? And even, will LightSquared rise from the dead?
Softbank officially announced on Wednesday that it had closed its $21.6bn acquisition of 78% of Sprint, which immediately gives the operator a $5bn cash injection to accelerate its LTE and Network Vision roll-out. Dan Hesse remains CEO of Sprint, while Softbank’s maverick founder and CEO Masayoshi Son will chair the board. Because Sprint is now under foreign ownership, Mike Mullen, former chairman of the Joint Chiefs of Staff, will join the board to oversee security issues.
And recalcitrant Clearwire shareholders, led by Crest Financial, finally recognized that Dish was not going to raise its offer again, and voted to ownership by Sprint, which already held just over 50% of the venture. The insistence of Crest and other shareholders that Sprint was undervaluing Clearwire’s spectrum helped to bring Dish into the race and boost the price to the current offer of $5 a share ‘ 68% higher than Sprint’s initial bid of $2.97 a share back in December.
Sprint will get far more than financial stability and the $5bn injection from its Japanese deal. It can also tap into the expertise of a company which has made it clear it will be very hands-on, seeing the US as a key market where it can expand more rapidly than in its saturated home base, and which has a strong track record of innovating in services and networks ‘ innovation which turned it from the failing Vodafone KK into a highly disruptive third player, which has closed the gap with NTT Docomo and KDDI.
Softbank was quick to outline some early plans for its new unit and promised to spend $8bn this year, and the same amount in 2014, to try to catch up with Verizon and AT&T. Spending will slow to about $6bn a year after that, when the bulk of the LTE roll-out will have been completed and expansion will rely more on software and small cells. Son told Japanese news agency Nikkei that some of the planned capex increases will come from cost savings and synergies associated with the merger. Bringing some Japanese-style innovation to the party, he said Softbank and Sprint will open a joint R&D center in Silicon Valley to develop hardware and software.
Dish will now be reconsidering its options. It needs a wireless network to expand its pay-TV operations into a full quad play, the secret to increasing ARPU in a crowded and price-pressured market. The spectrum it already owns, in the AWS-3 band (formerly for satellite), is insufficient on its own to support the broadband LTE network it requires. It could sell that spectrum on for a profit, and rely on partnerships for its wireless offerings. We have argued before that its best bet lies in negotiating an alliance with Sprint/Softbank/Clearwire, now the recent battles are over, which could involve spectrum sharing on both sides, and a 4G system hosted on Sprint’s Network Vision platform. Sprint has plentiful spectrum and such a deal could generate early revenue for Vision, replacing the hosting/spectrum agreement it once negotiated with LightSquared.
While LightSquared itself may re-enter the mix (see below), Dish’s more obvious alternative is to work with T-Mobile, or even to try to buy out Deutsche Telekom from the firm. The German firm, as a condition of the merger of its T-Mobile USA unit with MetroPCS, has to wait for two years before selling its shares, unless it offloads the whole stake to an acquirer. Dish ‘ and Softbank, as a back-up should its Sprint bid fail ‘ have reportedly been in talks this year with DT about possible combinations and TMo’s vocal CEO John Legere told CNet this week that he would be open to alliances with Dish or even Sprint. “When I look at the medium to long term, I’m intrigued by Dish’s vision,” he said.
In the end, for all these second tier players, the primary aim is to reduce the power of the big two, even if that means working with unlikely partners.
As well as TMo, Dish could also consider acquiring rival DirecTV in order to strengthen its core satellite business, defocusing on mobile for a while or relying on less ambitious routes such as MVNO deals. A Dish/DirecTV merger was blocked by antitrust regulators in 2001, but the market has changed since then. Although Dish chairman Charlie Ergen has been dismissive of revisiting DirecTV, satellite analyst Tim Farrar envisages a scenario in which Dish reins in its wireless plans to focus on using its spectrum for fixed wireless residential services, in which case joining with its head-on competitor would increase reach and scale (Dish is already trialling fixed LTE services in its AWS-3 frequencies with rural provider nTelos). The resulting network could also provide mobile backhaul services to cellcos.
Farrar thinks Dish could attract AT&T into an alliance with the carrot of its fixed wireless network, providing backhaul as well as roof-top cell sites for small LTE cells. That could lead to a broader alliance to mirror Verizon’s with several cablecos, which has allowed the telco to move into markets where it has no broadband presence, and attack AT&T’s U-Verse. However, to help AT&T fight back, Dish would need more spectrum, and could even turn its eyes to LightSquared, currently languishing in bankruptcy protection because the spectrum in which it was due to deploy LTE-Advanced was judged to be too close to GPS bands.
However, Ergen has bought a significant amount of LightSquared’s debt through a hedge fund and has reportedly offered $2bn to acquire the firm’s L-band spectrum outright. There may be a chance to combine those frequencies with Dish’s own S-band holdings ‘ also acquired from bankrupt mobile satellite providers ‘ in a reconfigured design that would not interfere with GPS.
Any such talks would be fraught ones though. Harbinger Capital, the Phil Falcone-led hedge fund behind LightSquared, has accused Ergen of acquiring its debt fraudulently in order to gain control of the venture at a knockdown price. In a bankruptcy filing this week, Harbinger accused Ergen of using a front company to buy up nearly $1bn in LightSquared, and said his hedge fund, Sound Point, ‘fraudulently entered LightSquared’s capital structure’ to prevent the company from successfully reorganizing and to “acquire the debtors’ assets on the cheap’.
Falcone has been awaiting a ruling from the FCC on whether LightSquared can swap its current spectrum for other frequencies, at a safe distance from GPS, which are currently controlled by the government. In May, the regulator said the firm could temporarily share some of this spectrum to test whether its proposed network could coexist with federal agencies’ applications.