It is, as we have commented in the past, like a long and particularly Machiavellian episode of Game of Thrones, but we did forecast that nether Charter nor Comcast would want to merge with Sprint, and that the exclusive chats they were having were just that, chats.
Sprint is the US cellular network growing slowest, when it is growing at all, while T-Mobile has definitively overtaken it as the disruptor in the market. AT&T has made a turnaround in the past quarter, based on introducing an unlimited data offering and Verizon is the end-game as far as the large US cable firms are concerned.
Cable this week pretended that it does not want to own a cellular network, primarily citing increased competition and semi-saturation of the market, T-Mobile has been handed its least number of phone additions in 3 years, and Verizon now seems to be the laggard and AT&T’s acquisition of DirecTV has given it the beginnings of a quad play. We do not think anyone stops until they also have a quad play.
Meanwhile Charter and Comcast already have this under development, but primarily through an MVNO with Verizon. The longer they prevaricate about any suitor they may end up with, the more likely that they will learn how to grow cellular customers in this market and the lower the stock market prices will go as the growth fundamentals of the US MNOs begin to get stretched.
Which is why this week SoftBank CEO Masayoshi Son, turned the screw on Charter and suggested it wanted to buy Charter, not the other way around. Legally Charter could not go down that route, given the assurances it has given Comcast about partnering it in cellular, at least not for almost a year. If Comcast and Charter do something together, they can tear up the contract, but if one of them breaks ranks, there will be a substantial payment for the contract breakup and we see neither of them going down that route.
Let’s look at the combinations that are possible, and eliminate those that are not. None of the cable companies can merge with AT&T, partly because the broadband concentration, but mostly because of the pay TV concentration. One regulator or other would block it. Comcast could afford to buy any of the other MNOs in the US, but it has seen the risk of holding large amounts of debt when it acquired AT&T Broadband to double its size in 2001, and once again after it acquired NBC-Universal in 2013 for a total of $23 billion in two transactions. In both cases there it knew what it was buying, in this case it will know far less.
Comcast has eyed Sprint both before and after the Nextel merger and never really shown any interest in getting more deeply involved. Sprint is then desperate not to be the only person at the wedding without a date, which is why Wall Street has already moved on from speculation about this deal to one about Dish and Sprint.
There is a genuine problem for that deal, but we are not saying that it won’t get done. Dish has not got any fixed network to bring to the party and Sprint will need them for 5G backhaul; but also Sprint has never taken any initiative to bring video over its phones lines, apart from signing up an arms’ length deal with MobiTV. Finally, Dish holds a lot of spectrum that it diligently went about acquiring from bankruptcies, and the last thing Sprint needs is spectrum, it has more than any of the other MNOs. Of course it does not have any 5G millimeter wave spectrum, and it will have to acquire that at some point we assume. Would Dish CEO Charlie Ergen really want to just sell all that spectrum he gambled on at a knock down price, as a condition of a merger? Probably not.
Sprint’s only real chance of a deal is a merger with T-Mobile US, with T-Mobile management ending up running the show with Deutsche Telekom the major shareholder. Again, we would not want to take on 5G without a significant fixed line capability and they don’t either. So while this could happen, it would only make sense if Comcast or Charter or Altice or all of them, agreed to pledge their significant fixed line capability to the cause, in a 2 way or 3 way group of minority interests. So T-Mobile buys Sprint with money from Comcast and Charter and others, on the understanding that it would become their MNO partner. This is close to what happened with Sprint and Clearwire, and was a deal that cable firms walked away from. So not too likely, although plausible.
Charter is not big enough to do a major deal on its own, except with Sprint and it has already said no to that.
This means that the only deal that makes sense to us is Big cable, each buy shareholdings in Verizon, say a 30% for Comcast, 30% for Charter, some for Altice and the rest remains public, and they all run a single cellular network supporting their quad play.
It would still have regulatory issues, but perhaps not insurmountable. Selling off the Verizon fixed line network would be achievable; getting rid of Oath is neither here nor there; and since each of the cable operators would only have a shareholder relationship, there might not be a perceived concentration of broadband, enough to worry the Justice Department.
A deal like this would worry quite a lot of people, mostly AT&T, Sprint and T-Mobile, but it would be a tough deal to say no to under a republican regime.