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Sprint continues to battle for T-Mobile deal

Updated: 2014-02-08T04:29:53Z

By MARK DAVIS

The Kansas City Star

Like a determined salesman who won’t take “no” for an answer, Sprint Corp. keeps pushing for a merger with T-Mobile US Inc.

The rival wireless companies have publicly pitched the benefits of a deal for months. Overland Park-based Sprint is reportedly lining up financing, and its leaders recently sat down with industry overseers. One report has an announcement coming as early as next week.

Sprint is scheduled to report its year-end financial results Tuesday.

All this despite an increasingly clear message from Washington regulators: They’re not buying.

Sprint and T-Mobile “want to do this so badly that they’re willing to keep knocking at the door,” said Jeffrey Silva, an industry analyst with Medley Global Advisors.

Neither Sprint nor T-Mobile would discuss the reports of a potential deal.

But the nation’s third- and fourth-largest wireless companies both have argued that, together, they would offer greater competition for the industry’s top dogs, Verizon and AT&T.

But Washington regulators are likely to argue that such a deal would be no good for consumers. The Kansas City area might fare worse as well.

The case for a deal

The argument for merging Sprint and T-Mobile largely comes down to size. In wireless, bigger is better.

Any national wireless carrier up to the competition has to build an expensive network to cover most of the country and offer the latest technology to attract and keep subscribers.

Verizon and AT&T lead in that race and have in the neighborhood of 100 million subscribers each to help pay for the effort. Sprint and T-Mobile each have half that, or less, even as they’re spending billions on their networks to catch up.

Put Sprint and T-Mobile together and their subscriber count and wireless revenues would come much closer to the size of Verizon’s and AT&T’s.

Scale would offer other benefits. One company could get by with fewer cell towers than two trying to cover the same territory twice. As a bigger buyer of network equipment and cellphones, a combined company would have greater bargaining power with the companies that sell these things.

They could pool their marketing dollars behind one message, handle customers’ complaints and questions with fewer call centers, reach subscribers with fewer retail stores and otherwise take advantage of what Wall Street analysts call synergies.

“Merging the third and fourth U.S. network operators should create substantial synergies,” analyst Frederic Boulan at Nomura’s global market research wrote in an early January note to clients.

The Kansas City area could take a jobs hit if the companies merged. T-Mobile and Sprint essentially would have two of everything and look hard to find ways to get rid of unnecessary costs.

Sprint didn’t have this problem last summer when SoftBank bought control for $21.6 billion because SoftBank’s wireless business was in Japan.

Much of the speculation about Sprint’s interest in a deal now revolves around its new chairman, Masayoshi Son, who founded and leads SoftBank. Son has made growth a focal point for SoftBank.

A merger with T-Mobile is Sprint’s only chance for a “a great leap forward” in its share of the U.S. wireless market, analyst Silva said.

Sprint also may not feel it can afford to miss out on a T-Mobile deal now.

“It’s the best option, and that option may not be available in a few years,” Silva said.

Deutsche Telekom, which owns 67 percent of T-Mobile, has been trying to sell for years. Some speculate that Dish Network, the Colorado-based satellite television company that battled SoftBank for control of Sprint, might be waiting in the wings if Sprint’s effort fails.

Now, Sprint and T-Mobile separately battle a pair of daunting rivals that executives at each of the underdogs have labeled a “duopoly.” Duopoly is the idea that the two biggest companies operate something like a shared monopoly.

Sprint chief executive Dan Hesse screamed duopoly in his successful quest three years ago to stop AT&T’s $39 billion deal to buy T-Mobile. Gobbling up T-Mobile would hurt consumers and competition, was the cry.

Regulators and antitrust officials in Washington agreed and blocked the deal. They don’t seem to have changed their minds about a Sprint and T-Mobile combination, despite the argument it would create a stronger No. 3 rival for AT&T and Verizon.

Cold shoulder

Telecom analyst Craig Moffett, of MoffettNathanson Research, called the government’s opposition to the AT&T and T-Mobile deal a “read my lips” moment. Washington regulators want four national carriers, not three, and said so in that case.

In his most recent report on Sprint’s interest, Moffett weighed in with a litany of signals from Washington that show regulators aren’t interested in a new deal for T-Mobile.

He cited a letter last April from the Department of Justice to the Federal Communications Commission, each of which would have to OK a deal. It cited the four national carriers and reinforced the Justice Department’s “vigilance against any lessening of the intensity of competitive forces.”

He recited The New York Times’ published quote from the department’s antitrust chief, Bill Baer: “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers.”

It seems like piling on when he points out that the deputy assistant attorney general in antitrust is Renata Hesse, who is unrelated to Dan Hesse at Sprint but had “spearheaded the team that killed the AT&T/T-Mobile deal” when she worked at the FCC.

Speaking of the FCC, its new chairman, Dan Wheeler, had told Sprint’s Hesse and Son during a January meeting that he would keep an open mind but was highly skeptical of the merger idea, according to Reuters.

More than preserving four carriers, the rejection of AT&T’s bid kept T-Mobile as a player, and its successful “Un-carrier 4.0” campaign has reinforced regulators’ notion that they got it right.

In the campaign, T-Mobile has challenged the market with faster upgrade plans, lower prices, installment plans to buy phones and a deal to pay the early termination fees of rivals’ contract customers who switch to T-Mobile.

It has been building its speedier network “faster than anybody thought they could,” said Donna Jaegers, an analyst with D. A. Davidson & Co.

In the process, it also has gained new subscribers for the first time since 2007, even as Sprint has slowly lost customers.

“You’ve got the regulators feeling pretty good,” Jaegers said.

Washington’s cool reception to a merger suggests it wants the carriers to compete under current arrangements, at least for now, and especially since T-Mobile has been gaining ground.

Wild cards

Sprint, however, continues to weigh the idea of a bid. A decision is expected in the next few weeks, according to reports this week from Bloomberg News.

Silva said one tactic might be to battle it out in court. That would mean convincing a federal judge that the government’s preference for four instead of three national carriers amounts to a government policy call, rather than a true stand against violation of anti-trust laws.

Winning at the FCC might require an extensive set of concessions that would preserve T-Mobile’s maverick approach, he said. It would be a high-risk fight, Silva noted, against the high reward a merger would bring.

Berge Ayvazian, an analyst at HeavyReading.com, offered another idea. Buy the business but skip the merger and operate the two carriers somewhat independently.

Meet with the regulators and antitrust lawyers and bring along John Legere, the brash chief executive of T-Mobile who has personified its Un-Carrier message.

“Let him convince the FCC that this would be pro-competitive,” Ayvazian said.

Under SoftBank’s ownership, T-Mobile and Sprint still could pool their cell towers, share wireless spectrum and gain bargaining leverage over vendors. Ayvazian said each could remain separate brands competing for customers.

Of course, they wouldn’t compete against each other in the same way they do as separately owned businesses, he said. But each, he said, would be in a better position to take on Verizon and AT&T.

“I don’t think you can call it a merger. You have to keep two separate companies,” Ayvazian said.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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