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Legere to run combined company, with SoftBank’s Son on board
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Deutsche Telekom to end up with 42% stake, SoftBank with 27%
T-Mobile US Inc. agreed to acquire Sprint Corp. for $26.5 billion in stock, a wager that the carriers can team up to build a next-generation wireless network and get a jump on industry leaders Verizon Communications Inc. and AT&T Inc.
The deal follows years of will-they-won’t-they deliberations between Deutsche Telekom AG, the German company that controls T-Mobile, and SoftBank Group Corp., the Japanese owner of Sprint, and comes about five months after an earlier merger attempt collapsed. The combination reduces the U.S. wireless industry to three major competitors from four, ensuring heavy scrutiny from regulators.
“‘We are going to have an impact on America,” John Legere, the T-Mobile boss who will serve as chief executive officer of the combined entity, said on a conference call Sunday. Rivals such as Verizon, AT&T and Comcast will have to respond, he said. “We are going to drag the rest of the players kicking and screaming to the prize, which is American leadership” in fifth-generation wireless networks.
Operating as T-Mobile, the company would have about $74 billion in annual revenue and 70 million wireless subscribers. Verizon is the largest U.S. carrier with $88 billion in 2017 wireless revenue and 111 million subscribers, and AT&T would be No. 2 with $71 billion in wireless revenue and have 78 million regular subscribers.
The combination values each Sprint share at 0.10256 of a T-Mobile share, the companies said in a statement Sunday, or about $6.62 a share based on T-Mobile’s Friday closing price of $64.52. The ratio was originally fixed based on T-Mobile’s share price at the close on April 9, before news of the renewed talks emerged, and would have valued Sprint at $6.13 a share based on that price, one of the people said. News of the talks sent both companies’ stocks surging, adding to the valuation of the deal. Sprint closed Friday at $6.50 a share.
Company’s Structure
The implied enterprise value is about $59 billion for Sprint and $146 billion for the combined companies, according to the statement.
Under terms of the deal, Deutsche Telekom will end up with a 42 percent ownership stake while SoftBank will have 27 percent. T-Mobile’s Mike Sievert will be president and chief operating officer. The German company’s chairman, Tim Hoettges, will serve in that role at the combined company, and the board will include SoftBank Chief Executive Officer Masayoshi Son.
Deutsche Telekom rose 1.3 percent to 14.74 euros at 9:22 a.m. in Frankfurt on Monday. SoftBank rose 4.1 percent, the steepest increase in almost four months, to close at 8,501 yen in Tokyo on Friday.
The companies said they expect synergies of about $43 billion based on net present value, with more than $6.5 billion on a run-rate basis, with most of the savings coming from network spending. Combining networks will eliminate future costs to upgrade and operate one of the networks, and by consolidating overlapping properties the new company can vacate unnecessary antenna towers. Neville Ray, T-Mobile’s chief technology officer, said the new company planned to decommission 35,000 cell sites.
Unlike other mergers that achieve cost savings by eliminating duplicate staff, the executives plan to keep dual headquarters in Bellevue, Washington, and Overland Park, Kansas. Sievert said the combined worldwide workforce of about 240,000 employees will increase once the merger is complete. Most of the new jobs will be network related, many in rural areas where network expansion is planned.
Previous Attempts
The deal marks the third time that SoftBank’s Son has acted on his long-held plan to combine Sprint and T-Mobile. Previous negotiations broke down after the two sides couldn’t agree on how to structure control of the combined entity, people familiar with the matter said at the time.
The two carriers have complementary wireless spectrum that may be a strategic advantage as the companies build a faster fifth generation or 5G network. T-Mobile controls a large portfolio of lower-band airwaves that can travel long distances and pass through walls and windows. Sprint has the largest U.S. holding of higher-band, 2.5 gigahertz spectrum that can handle more data capacity but over limited distances.
The transaction would be “good for consumers, good for the economy, good for the country,” Sprint CEO Marcelo Claure said on the conference call Sunday. Claure will serve as a board member of the combined company.
Washington Scrutiny
The companies dashed a previous plan to merge in 2014 after meeting resistance in Washington. Regulators said that a four-competitor wireless market fosters more choice, price competition and innovation, which proved to be largely true.
Consumers will be the losers if T-Mobile and Sprint are allowed to merge, said Gigi Sohn, a fellow at the Open Society Foundations and former aide for the Federal Communications Commission. “Both companies have been feisty competitors to the two biggest national mobile wireless carriers, Verizon and AT&T” and a combination will lead to less choice for consumers, Sohn said.
Sprint and T-Mobile will try to convince regulators and possibly President Donald Trump that the combination will lead to bigger investments in 5G networks and put pressure on larger rivals, even though consumer benefits aren’t obvious and heavy job cuts are expected. The Trump administration is currently trying to stop AT&T Inc.’s $85 billion takeover Time Warner Inc., saying the deal will lead to higher pay-TV prices.
“Like other companies, T-Mobile and Sprint are confident the merger will be approved and they are special and shouldn’t be judged like other mergers,” said Roger Entner, an analyst with Recon Analytics LLC. He’s skeptical that jobs won’t be cut, saying that “those kinds of synergies don’t happen without layoffs.”
Brian Hart, a spokesman for the FCC, declined to comment.
Sprint Life Raft
For Sprint, which hasn’t had a profitable year in more than a decade, the merger is a bailout. The company is four years into a go-for-broke turnaround effort launched when Claure took over as chief executive officer and started slashing prices on phones and offering half-off service plans to stop customer losses.
Sprint Cash Burn
But the price battles only further fueled the cash burn. The need for more and more financing took the company back to the junk-bond market in February after a three-year absence. In March, Sprint sold a second round of airwave-backed bonds.
Under Legere’s leadership T-Mobile became the fastest growing carrier gaining more than 6 million subscribers over the past three years, though the pace of that growth has steadily slowed. T-Mobile has forced the industry to try and match its sales techniques like offers including phone financing, free video streaming and unlimited data plans.
For SoftBank, the transaction puts the mobile-service empire that billionaire CEO Son built in a better position to compete with U.S. cable companies by offering high-speed wireless internet connections and streaming video. The combination also gives Deutsche Telekom a stronger vehicle to expand in the profitable U.S. market.
T-Mobile was advised by PJT Partners and Deutsche Bank, while Goldman Sachs advised the company and its controlling shareholder Deutsche Telekom. Morgan Stanley also helped Deutsche Telekom and Evercore advised T-Mobile’s committee of independent directors. Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and RBC are providing T-Mobile with committed debt financing.
Sprint was advised by Raine Group and JPMorgan, while Centerview Partners helped Sprint’s independent directors. Mizuho Securities and SMBC Nikko Securities provided financial advice to SoftBank.
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