Sprint Merger with T-Mobile Gets Closer; Incompatible 2G/3G Technologies is an Issue
German newspaper Handelsblatt yesterday reported that T-Mobile US Inc.’s parent company (Deutsche Telekom AG) favors a merger with Sprint. Deutsche Telekom AG, which controls T-Mobile, aims to maintain control of the combined company after an all-stock deal with Sprint, according to Handelsblatt, which cited sources close to the German company’s management committee and board.
Bloomberg reported two weeks ago that Sprint and T-Mobile were considering an all-stock deal. Sprint and T-Mobile were also talking to other potential merger partners, Bloomberg reported then, citing people familiar with the matter. Executives of both companies have said a merger would produce billions of dollars in cost savings and help them compete against larger rivals AT&T Inc. and Verizon Communications Inc.
When the merger was rumored months ago, SoftBank — Sprint’s parent company — reportedly had not pushed the subject due to strict U.S. Federal Communications Commission rules prohibiting rival carriers from conspiring during airwave auctions.
Now, the report claims that final measures are being put in place to complete the merger and the all-stock agreement would eliminate transaction costs with a deal like this because both companies would be exchanging stock rather than actual money.
This news also comes right after Sprint introduced its new promotion to encourage customers to ditch their current carriers. Those who switched to Sprint would receive unlimited data for up to five lines for free — making it clear that the carrier might be in trouble.
Sprint has consistently been playing catch-up with its rival carriers — AT&T, Verizon, and T-Mobile. Last year OpenSignal reported the carrier took last place in all categories ranging from speed to latency. On the other hand, T-Mobile had an increase in 4G coverage at 81.2 percent — which was neck and neck with AT&T at 82.6 percent — trailing closely behind Verizon. Sprint came in last, yet again, at 70 percent.
T-Mobile has been making efforts to improve its service across the board after having rolled out LTE on the 700MHZ spectrum. The OpenSignal report also measured LTE speeds in 11 of the biggest metro areas where T-Mobile won in four cities — placing it ahead of Verizon’s three — but the two carriers tied in Atlanta, San Francisco, and Washington, D.C.
A merger would likely see T-Mobile and Sprint’s networks also unified, although that would take much longer than many pundits expect. That’s because Sprint uses CDMA technology to power its 2G and 3G networks, while T-Mobile uses GSM (like all of Europe). The two wireless digital transmission technologies are not compatible, and CDMA would likely have to be phased out (along with some customer devices) before the two networks could truly unify. In the short term, internetworking units would be needed for seamless connectivity between wireless endpoints.
Also, T-Mobile has announced a nationwide 5G network, while Sprint has not, although it’s working with several companies (including Intel) on 5G software technologies.
Verizon still remains champion when it comes to coverage nationwide and reliability. AT&T is a close number 2. T-Mobile, which this year passed Sprint as the #3 U.S. wireless carrier, has been very aggressive and is clearly working to toward getting ahead. Sprint has lagged behind, most likely because it had to jettison its WiMAX network and replace it with LTE.
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Update: Sprint CEO interviewed on CNBC, June 22, 2017:
A combined T-Mobile–Sprint could pose a “powerful” threat to telecom giant AT&T, Sprint CEO Marcelo Claure told CNBC on Thursday, June 22, 2017.
“We have looked at every other alternative to make sure we are making the right decision,” Claure said on “Halftime Report.” “If the government works to allow us to combine, we’ll be No. 3, but we’ll be a formidable competitor and we’ll continue to disrupt the industry.”
The Sprint chief spoke after a meeting at the White House with President Donald Trump and other tech leaders to discuss the potential impact of emerging technologies on U.S. industrial workers, among other topics. Representatives from Verizon, AT&T and T-Mobile were also at the meeting, Claure said.
On Tuesday, German business newspaper Handelsblatt reported that Deutsche Telekom, T-Mobile’s parent, was prepping documents for a potential merger with Sprint. T-Mobile declined to comment but sources said the company is sounding out if there are any government objections to a deal, the newspaper reported.
T-Mobile did not immediately respond to a request for comment from CNBC.
Wall Street has frequently speculated about a possible merger of the two companies.
On the regulatory issues of such a deal, Claure said with more companies in the telecom market, like Comcast and Google, it is less likely to raise an eyebrow from the government. “You’re talking seven or eight formidable competitors today,” he said.
More importantly, “we’re going to need to make some serious investments in order to bring 5G to the United States,” he added. “And that’s going to require to the tune of $40 to $50 billion of investments.”
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The Wall Street Journal reports that cable behemoths Charter Communications and Comcast , have entered into exclusive talks with Sprint to discuss plans to offer wireless services, putting Sprint’s merger talks with T-Mobile on hold temporarily. There are multiple outcomes that could stem from the discussions. The most likely outcome is that Comcast and Charter will sign a deal for access to Sprint’s nationwide network, much like the MVNO deal Comcast has with Verizon for its Xfinity mobile services. There is also a possibility that they could pick up an equity stake in Sprint, allowing them to extract much more favorable terms for re-seller agreements. There also remains a small possibility that one or both companies could buy Sprint outright. This may also make sense, given the potential to cut costs in areas such as sales and customer support, while prepping Sprint for next-gen 5G technologies, which require dense fiber networks for backhaul (see Why Cable Companies Are Still Interested In The Cutthroat Wireless Market). That said, we think it’s unlikely that the net-value added by a cable deal would match the sheer extent of cost synergies that could come from a Sprint – T-Mobile merger.
References:
https://www.forbes.com/sites/greatspeculations/2017/06/28/charter-and-comcast-court-sprint-but-t-mobile-remains-its-best-bet/#2b200ec7b7bf
https://www.wsj.com/articles/sprint-enters-into-exclusive-talks-with-charter-comcast-on-wireless-deal-1498524087