Evaluation of the Merger of T-Mobile and Sprint

Merger of T-Mobile and Sprint

In the US, there are now four main telecommunications, AT&T, Verizon, T-Mobile and Sprint. The previous two companies are far larger than the latter two. Therefore, strategically, it is a wise idea for T-Mobile and Sprint to merge and compete in the industry together. This is not the first time the merge been brought up, they have tried twice before. (Cheng, R. (n.d.).(2020)) In 2004 and 2007, there were discussions for the deals, however, it fell apart due to the regulation, which insists on maintaining four main competitors, and the different opinions on the shift of control. Another $26.5 billion deal has been announced two years ago, and the US District Judge Victor Marrero approved the deal on February, 11. (Cheng, R. (n.d.).(2020)) The reason why it took so long to go through the deal is that some of the states have concerns about the merge and took actions. Led by New York, 14 states and the district of Columbia have filed a lawsuit to stop the deal. (FitzGerald, D. (2020, February 16)) They claimed that if the two companies merged, there would be lower competitiveness in the telecom industry and might potentially drove up the price of the cell phone planes, violating the customer’s right. Also, fewer competitors mean that the industry would lack the incentive to be innovative since those companies don’t have a lot of pressure to outperform others. The Federal Communications Commission (FCC) officially voted to agree on the deal and rejected the claims of the states. Nevertheless, the deal comes with some additional conditions.

The two companies have to help form the forth nationwide competitor, Dish Network, which is a satellite TV provider. The Dish can acquire Sprint’s prepaid business and some wireless spectrum for $5 billion and it also has free access to the T-Mobile cell site and network. (Contreras, S. (2020, February 14).) By agreeing to expend its business into the telecom sector, Dish can get an extension on its airwaves license which will be expired in March 2020. Also, the access of T-Mobile airwaves for seven years can help the company start its service quicker and more cost-effective. In this deal, Dish can gain some advantage but T-Mobile and Sprint, the acquirer and target, would be the main beneficiary.

When the merger been approved, both of the companies’ stock price soared 61% and 78%, respectively. (FitzGerald, D., & Krouse, S. (2020, February 11)) This shows the positive attitude of the investors toward the merger. By combining two companies, they can enjoy larger customer bases, the economies of scales, and build a better network compare to working on their own. The complementary of their strengths and weaknesses regarding coverage and speed can boost competitiveness. T-Mobile can strengthen by the Sprint’s wireless radio licenses too. (FitzGerald, D., & Krouse, S. (2020, February 11)) The increase in the combined asset of the new company can give them a head start in the 5G war and build the service easier by having more cash flow and resources. (Cheng, R. (n.d.) (2020)) This deal have pressured their major competitors, Verizon and AT&T, to upgrade their carriers' speed, keep up the trend of 5G and improve their services. Regarding 5G, there are promises that T-Mobile has to keep with FCC.  The new company needs to have 5G coverage over most US in the next decades and build services in rural areas, making 90% of Americans having access to mobile services.

Another important part of the deal is financial. How the acquirer is going to finance its deal to buy the target? T-Mobile has some strategies. It is going to use $19 billion of secured bonds, which rate BBB by Moody’s, S&P and Fitch, and $4 billion of secured loans to support the deal. (Stephen Flynn Team, Bloomberg Intelligence (2020)) Usually, investors have more incentive to purchase secured debt rather than an unsecured one since they can get some protection when the debt being defulted. The company can refinance by selling notes and wanted to drastically pay down its debt, including $11-$12 billion of Sprint debt and $4 billion secured loans of Deutsche. Also, they are expected to change the existing debt structure and may potentially help to raise the debt ratings, lowering the cost of debt and raising more capital. According to Bloomberg, after the deal closed, the pro forma cash balance will be $9.569 billion. The combined $5 billion of existing cash, $3.4 billion generated from new debts, $1.4 billion of asset-selling and profit comes from the agreement with Dish, which will buy pre-paid plan and spectrum for $4.99 billion. Aside from revenue, the deal also generates cost synergies. The new company can cut down the selling, general and administrative (SG&A) costs since they are operating in the same industry. Also, the operational expense and capital expenditure (CAPEX) are expected to decrease. The revenue and cost synergies will both decrease as the new company operates, and T-Mobile will spend some related costs at the beginning of the merger to combine the two companies.

Though the merger of T-Mobile and Sprint can generate revenues and cost synergies, however, there are still concerns and uncertainty left in the deal. Sprint’s’ stock price rises, but its recent performance goes down. On the other hand, T-Mobile's overall performance has improved, therefore, T-Mobile would like to renegotiate the deal. (FitzGerald, D. (2020, February 16)) This is one typical risk that the acquirer has to bear during the process of merger. The performance of the target may change and the intrinsic value will go up or down. Also, the overall economic environments and the change of regulation may affect the deal in the future too. Thus, directly affect the synergies. Though the deal has been approved by the FCC and the judge, there are still 13 states claimed that they are willing to fight in the long run to protect the innovation and the price. As for customers, the merger has agreed not to raise the price in the next three years, nevertheless, it’s hard to say if the business strategy will stay the same or not. Overall, the merger of T-Mobile and Sprint benefit the two companies, put pressure on their competitors and cast doubts on its customers. Also, the deal still needs to solve some issues, thus, has a long way to go before it closed.

References:

• Cheng, R. (n.d.). (2020) Here's everything you need to know about that merger of T-Mobile and Sprint. Retrieved from https://www.cnet.com/news/judge-signs-off-on-26-billion-t-mobile-sprint-merger-now-what/
• FitzGerald, D. (2020, February 16). New York Won't Appeal T-Mobile Merger Verdict. Retrieved from https://www.wsj.com/articles/new-york-wont-appeal-t-mobile-merger-verdict-11581884506
• FitzGerald, D., & Krouse, S. (2020, February 11). T-Mobile, Sprint Deal Wins Approval, Reshaping Industry. Retrieved from https://www.wsj.com/articles/judge-approves-merger-of-t-mobile-and-sprint-11581427244?mod=hp_lead_pos2
• Stephen Flynn Team, Bloomberg Intelligence( 2020), T-Mobile US: Liquidity (T-Mobile Credit Research)