Seth Goodwin
Sprint 4G Rollout Updates
Monday, April 30, 2018 - 5:00 PM PDT

After three previous attempts during the past four years, something many thought may never happen actually did. On Sunday April 29, T-Mobile announced they were effectively acquiring Sprint in an all stock deal, combining the third and fourth largest carriers in the U.S. wireless market. Pending regulatory approval, the merger is targeted for closing in the first half of 2019.

The Deal

The deal using an exchange ratio of 0.10256 Sprint shares for each T-Mobile share valued Sprint at approximately $26.5 billion (plus the assumption of Sprint’s $30+ billion in debt) or $6.62 per share using T-Mobile’s Friday closing price of $64.52. The combined company “New T-Mobile” will be owned 41.7% by Deutsche Telekom, T-Mobile's parent company. 27.4% of the company will be owned by Sprint's parent company SoftBank, with the remaining 30.9% owned by the general public and institutional investors.

According to terms of the deal announced by both companies in a joint press release, the combined T-Mobile will retain two headquarters in Bellevue, Washington and Overland Park, Kansas. Current T-Mobile CEO John Legere will retain that role at the new company. T-Mobile’s Mike Sievert will serve as President and COO. No Sprint executives were announced to the management team at this time. Deutsche Telekom's Timotheus Höttges will serve as chairman of the company's board of directors, and DT will have 9 seats on the board compared to SoftBank's 4. Sprint CEO Marcelo Claure, and SoftBank Chairman and CEO Masayoshi Son will occupy two of SoftBank’s seats.

As opposed to the famous T-Mobile/AT&T attempted tie up several years ago, this deal does not include a breakup fee should the merger fail to pass regulatory approval. Rather, Sprint has independently signed a roaming agreement with T-Mobile for four years that will continue regardless of the outcome of the merger. On the analyst call for the merger announcement Marcelo Claure said this would take effect immediately. As of the time this article was published, specific details pertaining to the roaming agreement and any actual known roaming connections have yet to materialize.

The Plan

Sprint and T-Mobile will continue operating separately until the conclusion of the merger, something that in and of itself raises multiple questions about this coming year. Hopefully we'll gain some more insights with Sprint's upcoming FY 2017/4th quarter earnings call.  Assuming approval, the companies announced that they intend on spending up to $40 billion in the first three years on capital expenditures and consolidating operations into a single entity. According to the press release, this represents almost 50% more than what Sprint and T-Mobile combined had spent over the past three years.

At the time of closing, the companies estimate that Sprint and T-Mobile will have approximately 110,000 macro cell towers. Of these, around 35,000 will be decommissioned due to co-location or other redundancies. 10,000 new sites will be added leaving New T-Mobile with approximately 85,000 macro sites. Within the first three years of a combined company it is also estimated that the carrier will have over 50,000 small cells independent of magic boxes. The two carriers currently have around 10,000 combined.

The stated plan is to “use T-Mobile as the anchor network” and use selected Sprint “keep” sites to add coverage and density. At a minimum, Sprint’s BRS/EBS 2.5 GHz spectrum will be added to T-Mobile’s sites and T-Mobile’s “full spectrum portfolio” will be deployed on Sprint’s “keep” sites. At face value, this would point toward mainly decommissioning Sprint sites as part of the 35,000-macro site reduction. In actuality we'll see what they do. For example all things equal, if two sites are co-located the greater synergies are in eliminating the tower rack with less favorable lease terms or worse rack location.

VoLTE and Two-dot-Five

The conference call noted while the goal is to migrate Sprint's CDMA customers to VoLTE as soon as possible, with 20 million Sprint customers having T-Mobile compatible handsets on day one. The intention is to have the total migration to T-Mobile completed over a three-year period without “degrading experience on Sprint’s network.” This suggests at a minimum keeping Sprint’s 1x800 voice service active during the transition as well as a deliberate coordinated process for overall decommissioning of macro sites.

The other thing to watch going forward in this area is that T-Mobile makes no mention in their investor presentation toward utilizing anything other than Sprint’s 2.5 spectrum on their sites. A Sprint T-Mobile merger would create a spectrum behemoth with holdings ranging from T-Mobile’s low band 600 MHz for building penetration and rural coverage all the way through Sprint’s 2.5 GHz for capacity and speed. On Sunday, executives announced they have no intention of divesting any spectrum. However, questions remain on issues like what does a company that already possesses 600 MHz and 700 MHz LTE spectrum do with 800 MHz? How do T-Mobile and Sprint independently spend CapEx this year without diminishing merger synergies? We at S4GRU plan on potentially analyzing a combined company’s significant aggregate spectrum situation in a separate article at a later date.

According to the investor information provided, the combined company is estimated to have run rate cost synergies in excess of $6 billion annually or on a net present value basis in excess of $43 billion. $26 billion NPV or $4 billion annually of these annual savings would be derived from network consolidation and CapEx synergies. Additional savings could come from consolidation of operations including store closing and eliminating corporate redundancies. From Sprint’s perspective these savings would be significant. The carrier has not turned a profit in the past 10 years. However, with these savings (even a portion of these savings) the carrier hypothetically would have been profitable all 10 years.

Regulatory Hurdles

This merger is not a done deal by any means. It faces regulatory scrutiny from the Department of Justice (DOJ) and the Federal Communications Commission (FCC). Under the administration of former President Barack Obama, AT&T and T-Mobile attempted to merge only to be shot down by the government. Sprint and T-Mobile were reportedly told not to even try four years ago.

The prior administration's thinking had constantly been that by allowing any combination of the big 4 U.S. wireless carriers to merge into three, consolidation would negatively impact the average consumer due to lower competition in the market. On the conference call Marcelo Claure noted that regulatory approval is “the elephant in the room.” Claure and Legere are expected to embark on a tour of Washington D.C. to try and gain favor for the merger later this week.

Much has changed in Washington since Sprint and T-Mobile’s last attempt at a tie-up, but whether or not a merger is anywhere close to a guarantee to pass remains in limbo. President Donald Trump has positioned himself as a pro-business President, meeting with Masa Son shortly after his election. And while Trump’s FCC chairman Ajit Pai has made comments signaling he may be more open to market consolidation than his predecessors; President Trump’s DOJ is simultaneously attempting to block AT&T’s acquisition of Time Warner. Claure and Legere noted that they had talked to Pai, but had yet to talk to anyone at the DOJ prior to announcing the merger.

The Sell

With nothing guaranteed, selling this merger to the government and the public is going to be the key factor on whether or not it ultimately gets approved. Sprint and T-Mobile executives wasted no time in starting on Sunday launching the pro merger site allfor5g.com. Legere and Claure continued touting the merger in a series of interviews and television appearances Sunday night and Monday morning. Based on early results, the argument for the merger is fairly crafted towards its intended audience.

The crux of T-Mobile and Sprint’s contention is that 5G is the future, and the future is costly. Both companies maintain a 3rd stronger carrier is better than 4 carriers in a market, two of which are at a capital disadvantage. Claure noted that, “It’s a very simple rule of business---both companies need each other.” Sprint has 2.5 GHz spectrum that will be optimal for 5G but lacks the financial resources to deploy its own. A new T-Mobile benefits from the 2.5 GHz spectrum, a larger combined customer base, financial synergies, and greater economies of scale to effectively deploy 5G. Legere noted their goal to eventually be able to provide 450 Mbit/s speeds consistently everywhere.

The 5G argument is significant for a couple of reasons. The first is the current administration has made 5G a quasi-national security issue. The merger of Qualcomm and Broadcom was blocked partially on the grounds of China taking the lead in 5G, and it was widely reported at one point that the Trump administration was considering nationalizing 5G out of security concerns with China. The goal here is that if you let New T-Mobile happen they contend that they will be in a position to deliver 5G rapidly, creating a sense of urgency that a deal needs to be approved sooner than later. If you don’t let them combine they aren’t in the same position to make that happen. They also contended that 5G would allow for the innovators of the future, a not so thinly veiled overall economic development message.

The other major 5G argument centers on rural expansion. For a long-time wireless rural cell service and rural broadband have been an important political and economic development issue. Historically rural service has lagged as the infrastructure cost to deliver service far exceeds any revenue operators can hope to recoup. Legere and Claure have immediately been pushing the notion that a merger would allow the combined carrier to bring rural broadband across the nation (as well as creating jobs in rural areas during the network deployment).

Lastly, their final argument centers around job creation. Typically, one of the reasons companies merge is that you can save money by eliminating duplicate positions within two separate organizations. Legere on Sunday claimed that this merger would create “thousands of American jobs” with 200,000 people working either directly for or on behalf of a combined entity. This likely faces more regulatory scrutiny than some of the other pro-merger arguments, as again typically mergers result in overall contraction. Furthermore, Sprint on its own announced several hundred layoffs within the past few months.

Why now?

In the near term, the FCC at some point soon is going to impose a quiet period forbidding anyone that is participating in this fall’s spectrum auction (an auction Sprint and T-Mobile are seeking a waiver for to jointly coordinate bidding strategies) from discussing mergers. Additionally, the longer the wait  is, it is likely some of the merger synergies would be eliminated. Sprint towers that are redundant to T-Mobile are not to Sprint itself. If Sprint's executive team was to be believed, Sprint was poised to spend $5 to 6 billion on Capex each of the next three years. Undoubtedly some of that, a potentially significant portion, would've been on towers T-Mobile has no interest in retaining. Slightly longer term, if there was ever a presidential administration to try this under it is this one. Much like this merger's outcome President Trump's re-election is far from a certainty. If a Democratic administration were to come back to Washington D.C. odds of any merger approval diminish significantly.

Longer term yet, Sprint hasn’t turned a profit in 10 years. Marcelo Claure has done a more than admirable job at steering the ship during his four-year tenure: cutting costs, coming up with creative cost-effective network deployment strategies, etc. However, at some point access to traditional borrowing markets may have been cutoff due to Sprint's inability to generate a profit or even consistent free cash flows. It didn’t appear imminent given their two-time borrowing this year, but the company has over $27 billion in debt due over the next 6 years. It is pretty easy to envision a scenario where bond investors said times up. Beyond that, the simple burden of debt may have become so overwhelming that even if it didn't threaten the going concern of the company, it negatively impacted capital expenditures, something we've seen recently.

Long-term is actually the story of the past 5+ years. Sprint has incredible spectrum assets, but it needed someone more financially able and willing to deploy them. SoftBank through either inability to act due to debt covenants with Japanese banks lending it money or through deliberate choice—in hindsight was never the savior it seemed. On paper, this merger should seemingly create a financially healthy company that finally is able to leverage Sprint's vast spectrum assets. However, as in the past, time will tell...

Source: 5gforall- https://allfor5g.com/