If T-Mobile merges with Sprint then where does US cable go for cellular?

One way that T-Mobile USA and Sprint could reduce their 5G capex bills, and placate investors and international parent companies, would be to combine their efforts, in a joint venture or a full merger. The two companies have danced around one another before, and now merger talks are reported to be back on, no doubt encouraged by a new government which is expected to be more laissez-faire when it comes to approving major M&A deals.

Sprint’s parent, Softbank, previously came close to bidding for TMO in 2014, but backed away in the face of probable opposition from the antitrust agencies. Earlier this year, with a new administration in place, Softbank chairman Masayoshi Son hinted that he would be interested in TMO, and might even sell Sprint in order to clear the way to acquire the more dynamic and rapidly growing operator.

Now shares in Deutsche Telekom, TMO’s majority shareholder, have jumped on reports that merger discussions have been initiated again. Although the German company has tried to sell its US subsidiary off before – to AT&T, and then to Sprint – it has a more valuable asset on its hands than it did then. Since Sprint backed away in 2014, it has been overtaken by TMO as the third largest US mobile operator, and its market value has risen significantly on the back of growth in market share and profits, driven by its series of ‘Uncarrier’ deals and promotions. TMO is currently valued at almost $55bn, and its share price has risen from $41 to $66 in the space of a year.

Merging with Sprint would give TMO far greater scale, which could improve the economics of its 4G expansion and 5G roll-out, and bring large numbers of new subscribers and MVNO deals into the mix. However, it would also put the Uncarrier firm’s recent growth and dynamic turnaround at risk, by forcing it to find common ground and culture with the very different beast that is Sprint. Despite its spectrum assets and technological ambition, Sprint has been very slow to improve its lamentable performance in customer acquisition and support, or to deliver on its promises of rolling out a high capacity LTE network.

Masayoshi Son, and DT’s CEO Timotheus Höttges, separately told investors last week that they would be open to discussions about a merger, though banks have not officially been hired, Bloomberg reported. Shares in DT, which owns 65% of TMO, rose by 4.9% on the reports, the biggest gain since the end of 2015.

Even in a more consolidation-friendly administration, there could still be regulatory restrictions on a deal, and other bidders may appear for either player – potentially with overbids, a move traditionally done to kill such deals off. Both Sprint and TMO have been recently rumoured to be potential prey for a cable company such as Comcast, Charter or Altice (or a group of them); and satellite pay TV provider Dish, which is a major spectrum holder, could also look to merge with an MNO.

On a recent earnings call, TMO’s Legere accepted a Sprint marriage was “one possibility” among many ways the industry might change in 2017 but insisted his firm did not need to be acquired. He also had his own M&A prediction to make – that Verizon and Comcast would combine. This has been a common rumor – as have reports that Comcast might merge with Liberty Global, or Charter, and then snap up TMO.

Certainly, the US telecoms landscape will shift some more before anyone launches commercial 5G. This month saw Comcast and Charter making a pact about wireless activities, which might reduce the chances of either being acquired by an MNO for at least a year – but could make them more likely to join forces to buy their own mobile operator, most likely TMO, or in a year or so from now, they might even take a joint pass at Verizon, as we argued last week.

It will also, almost certainly, accelerate the progress of cablecos’ mobile and quad play services, towards being real challengers to the established operators.