For weeks, reports have steadily confirmed that Sprint and T-Mobile are in negotiations to merge their businesses into a telecom behemoth as soon as the end of October. Previous merger attempts have been thwarted by regulators but analysts are predicting this time around that things could be different. Here’s everything you need to know about what’s going on, and what this could mean for your wireless service.
This story may sound familiar because similar mergers involving both parties were killed during the Obama administration. Back in 2011, the Department of Justice (DOJ) and the Federal Communications Commission (FCC) rejected a proposed merger between AT&T and T-Mobile. Technically, it wasn’t so much a rejection as it was the beginning of the rejection process, and the two parties decided to withdraw their application before records about the potential effects of the merger could be made public in an antitrust case filed by the DOJ. The fact that these companies didn’t want the public to know about the merger’s potential impact should give everyone a bit of pause. The DOJ argued that despite the companies’ claims, this wouldn’t be good for competition and would essentially turn the market into two players: Verizon and AT&T/T-Mobile.
Notice that DOJ wasn’t considering Sprint to be a viable competitor in that equation. Sprint wasn’t doing so great at that time. While it’s still in a distant fourth place, in 2012 it was on bankruptcy watch. Sprint’s parent company, Softbank, and T-Mobile’s parent company, Deutsche Telekom, started flirting with a merger based on the argument that neither telecom would survive without combined strength. In 2014, Softbank execs concluded that regulators wouldn’t allow the deal to go through, and they waved the white flag.
Did regulators do the right thing?
The thing is that in all these situations, the companies were complaining that they just couldn’t be competitive without a merger and in every case they figured the situation out. AT&T insisted that it needed to merge with T-Mobile because it wanted to rapidly expand its 4G coverage to keep up with Verizon. T-Mobile was floundering and insisted it needed a lifeline. Likewise, Sprint was failing and warning the government that it could go under without T-Mobile. All of these companies have done well for themselves since the DOJ and FCC didn’t believe them.
To be fair, T-Mobile got a nice cash injection when the AT&T deal fell through and the latter company had to pay out a previously agreed $4 billion breakup penalty, the largest of its kind in history. Since then, T-Mobile has gotten its act together, set the standards for unlimited data, surpassed growth expectations, and apparently built the fastest network. Meanwhile, AT&T has grown to be the world’s biggest telecom company with $163 billion in annual sales. The big bad Verizon boogeyman has had a 4.3 percent drop in sales and its profits fell by 25 percent in 2016.
Even Sprint has rebounded a bit. It’s pricing for existing customers hasn’t changed much but it has given people on other networks a pretty enticing option to switch with an offer of unlimited data for a year. Its stock has almost tripled since February of 2016. And it has been bragging that the wireless spectrum it’s been sitting on will be very valuable as higher speed networks become standard and can finally take advantage of it.
Long story short, regulators told the companies to tough it out, and they managed to do just that. Competition, even in this limited field, kind of works.
Why is now a good time for a merger?
To put it most simply, Donald J. Trump was elected President of the United States based on a populist campaign that promised to stick up for the little guy but everyone in the business world knew that was total bullshit. Who knows what Trump himself believes, but his cronies are a bunch of robber barons who want to “unleash” the American economy by giving the wealthiest people tax breaks and raising rates for the poor, increasing energy production by destroying the environment, and allowing enormous companies like telecoms to write the rules. Why would this administration block a merger?
In fact, if it were up to Trump-himself, you could consider it practically approved. Back in December, Softbank’s founder and CEO Masayoshi Son met with Trump and gave the attention-hungry president-elect the chance to falsely claim credit for a $50 billion dollar investment in the US coming from the Japanese company. Softbank’s investment had already been planned at least as early as October of 2016. Fortunately, when it comes to a Sprint and T-Mobile merger, the easily manipulated Trump doesn’t get the final say.
Unfortunately, the agencies that will be reviewing the deal seem inclined to allow big business to do whatever it wants with limited scrutiny. Federal Trade Commission Chairwoman Edith Ramirez resigned in February, leaving just two of the five positions on the FTC’s governing board filled. Ramirez was reportedly “urged to leave” due to the perception that she is tough on antitrust issues.
And the new head of the Antitrust Division at the Department of Justice, Makan Delrahim, was finally confirmed on September 27th. Delrahim is expected to be fairly lax on antitrust enforcement and according to the New York Times, his philosophy is, “A monopoly is perfectly legal until it abuses its monopoly power.” Robber barons, start your engines!
Who’s the top dog in this deal?
In 2014, it was Sprint that was looking to buy T-Mobile, but the tables have turned in three years. This time around, T-Mobile’s parent company Deutsche Telekom would be running the show if a merger goes through. And most reports indicate that the loud-mouthed T-Mobile CEO John Legere will be sticking around. And why wouldn’t he? Legere may be irritating, but he’s turned the company around, and he keeps T-Mobile’s aggressive attacks on competitors in the spotlight through his over-the-top social media presence. The biggest question is whether Legere will keep pushing his customer-first approach once he’s less of an underdog.
Some financial analysts also believe T-Mobile could sit back and miss the reported October merger target, while it waits for Sprint’s stock (which many observers believe is overvalued) to fall in price.
(Gizmodo reached out to both carriers for comment. Both declined.)
What does this mean for customers?
This is, of course, the biggest question. In the broadest terms, you have to ask yourself if you’d rather have four options or three. Most people would say the more options, the better. And they’d be right. As we’ve seen just in the last few years, when AT&T and Verizon killed their unlimited data plans (Verizon going so far as to say customers “don’t need” unlimited data), T-Mobile came roaring to life by offering the thing that everyone wanted. Generally, you can chalk up T-Mobile’s success to doing the opposite of its competitors and offering no-credit-check options, eliminating hidden fees, and other moves that earned it the name “Uncarrier.”
Sprint customers might see some new options coming from the T-Mobile world, and T-Mobile customers could get access to “premium” content on Jay-Z’s music streaming service Tidal, in which Sprint is a 33 percent stakeholder.
Former Federal Communications Commission chairman Tom Wheeler and former assistant attorney general for the Antitrust Division of the Department of Justice, Bill Baer, co-authored an op-ed for CNBC in May contending prices will surely rise for everyone if a merger is allowed to pass. They wrote:
Prices for wireless service — where there are four vigorous national competitors — are down nearly 13 percent in the past year, according to the latest CPI report from the Labor Department. Compare that with cable prices, where a lack of competition has allowed prices to increase 5 percent in the same time period.
The one area that seems likely to make this a good thing for existing customers is that coverage and speed will increase with the combined networks. You can see a map of T-Mobile and Sprint’s combined spectrum holdings here and Verizon’s spectrum holdings here for comparison. The newly-boosted T-Mobile will be giving competitor a fight in every respect.
What’s the argument for a merger?
We don’t know what exact arguments Sprint and T-Mobile will make in their filings with the federal government if they do decide to go through with a merger. We do know that they’ll likely emphasize that this somehow increases competition in the telecom arena and helps create jobs. Most of these arguments won’t have much merit. But one key question will have to be considered: Can Sprint survive?
Much of the focus is likely to be placed on Sprint’s viability in the near future. As we said, Sprint has managed to turn things around over the last few years and its enterprise value is currently sitting around $63 billion. T-Mobile has an enterprise value of $79 billion, but it’s not dealing with the same debt issues that Sprint has. Throughout Sprint’s resurgence, analysts have vocally acknowledged that things look better on paper for the company due to changes to its accounting approach that allow for it to show year-over-year growth. Meanwhile, Sprint has been racking up billions in debt by mortgaging off assets to raise cash. In just one instance, last October, the telecom put up a portion of its 2.5-GHz and 1.9-GHz spectrum valued at $16.4 billion in order to raise $3.5 billion in cash that will help cover the $10 billion in debt that will come due in the next three years.
That spectrum is very important for Sprint to hang on to because it’s part of the company’s long-term plan to be a major player in the market when 5G networks become the standard. T-Mobile will likely argue that adding Sprint’s spectrum holding will help it fight Verizon and AT&T in that upcoming battle.
According to the well-respected analysts at the telecom-focused firm MoffettNathanson, these arguments may not be enough. In its latest client analysis, provided to Gizmodo, the firm explains:
Against these arguments, however, stands the irrefutable history that T-Mobile has done very well on its own, thank you very much. Sprint, too, has seemingly gained momentum, not only in its subscriber results, but on an (admittedly messy and growing messier) accounting-adjusted EBITDA and margin basis as well. The very fact that Sprint’s stock has risen from the troughs of 2014 could be taken as evidence in Washington that the company is no longer an imminent bankruptcy risk.
Assuming that regulators actually give this merger scrutiny, the two companies will have to provide a good reason that a merger between the third and fourth biggest telecoms makes more sense than Sprint being rescued through a merger with someone like Comcast or Charter, both of which have been trying to push into the mobile phone market.
We can also expect to see the two companies run a propaganda campaign among the public to gather popular support for the merger. AT&T was particularly shameless with its use of this strategy when it tried to acquire T-Mobile in 2011.
How likely is this to happen?
It just depends on what you mean by “this.” MoffettNathanson is putting the likelihood of T-Mobile and Sprint attempting to consummate the deal at 80 percent, and the likelihood of regulatory approval at 40 percent. If the agencies in charge of approving the deal were fully staffed and run by people who were more inclined towards enforcement of antitrust regulation, the likelihood of approval would be lower. At the same time, career officials who want to do the right thing still exist at the agencies, and many people in Congress are sure to start a drumbeat around the anti-populist implications of this kind of merger.
Currently, we have a market in which two smaller companies push two enormous companies to treat customers better through offering alternative choices. If this deal goes through, we’ll have three companies of a comparatively equal size that are happy to keep their piece of the pie without rocking the boat very much. Considering the world we live in, Gizmodo is giving that undesirable outcome a 99 percent probability of happening.