T-Mobile deal makes life at Sprint weird for customers, employees and investors

The Sprint life is about to turn weird for customers, employees and investors as the Overland Park-based company tries to merge with rival T-Mobile.

Each group faces its own decisions during the year or so that federal officials will need to weigh whether to let the merger go through. Doubts about that approval make the situation all the more volatile.

If the deal dies on the vine, then everyone's chances shift back to when Sprint was going it alone.

The prospect of regulatory failure greeted the merger plan Monday morning when Wall Street issued a big raspberry. Sprint shares fell 89 cents, or 13.7 percent, closing at $5.61. T-Mobile stock lost $4.01, or 6.2 percent, and closed at $60.51.

This was completely contrary to the forecast that analyst Jonathan Chaplin at New Street Research had sent clients after the merger announcement Sunday. He'd expected higher stock prices on Monday, specifically $7 for Sprint and $75 for T-Mobile.

"It seems that the market is assuming approval odds of less than 20 percent," Chaplin explained to clients in a note Monday.

For Sprint customers, the T-Mobile merger essentially puts them in play. They'll have to switch to the T-Mobile network at some point if the merger is approved, and other carriers are certain to come calling.

This is exactly what happened for 5.4 million Nextel customers when Sprint, which merged with Nextel in 2005, finally decided in 2012 to shut down the Nextel network. At the time, Sprint was happy with its results though fewer than half of the Nextel customers made it to Sprint's network.

Industry analyst Roger Entner said this is the moment Sprint customers should wait for, when T-Mobile has a deal and starts actively moving folks onto its network.

"When the time comes, you will either upgrade your phone naturally or they will buy a phone for you, or somebody else will buy you a phone, like AT&T or Verizon," said Entner of Recon Analytics.

Sprint customers also might start looking for some sort of retention bonus from Sprint to stay on its network while the deal plays out in regulatory circles.

Employees, especially those in the Overland Park headquarters campus, will need to use the regulatory review time essentially to audition for a post-merger job. They may even be shooting for an invitation to T-Mobile's headquarters in Bellevue, Wash.

Sprint's Overland Park campus will serve as a second headquarters for the new T-Mobile, and Kansas Gov. Jeff Colyer said Monday that he'd been lobbying Sprint management for that.

"Although there may be some organizational changes, I am pleased that the state will retain this headquarters, and I look forward to continued work with the company to ensure that they grow and create great jobs right here in Kansas," the Republican governor said in an email to The Star.

Tim Cowden, CEO of the Kansas City Area Development Council, told the group's board of directors in an email Monday that he expects "there will be hard decisions made by the new T-Mobile management team about where the growth of the combined company will occur," particularly in its innovation around 5G technology.

A set of Sprint talking points with employees were on file with the Securities and Exchange Commission on Monday.

The document said that if executives were asked whether there would be headcount reductions, they should respond that the proposed merger was about growth and "we expect we will be creating jobs."

"There may be some overlaps, but we'll choose the best talent from both companies for those roles," the Sprint talking points said.

The Overland Park headquarters was referred to as HQ2 in the talking points, borrowing a moniker from Amazon for its secondary headquarters project.

The talking points also said that it would be "business as usual" at Sprint while the merger talks were underway.

"We must compete and beat T-Mobile, AT&T and Verizon, and all of our other competitors," the talking points said.

Fresh off the area's bid for Amazon's HQ2, Cowden told his board that the "KC team is prepared to compete for these new opportunities."

Sprint CEO Marcelo Claure and T-Mobile CEO John Legere vowed Sunday that the merger would create jobs from the beginning. They could not, however, assure existing Overland Park employees of job security.

Legere, in a joint appearance with Claure on CNBC Monday, explained that eliminating duplication is the reason why. He noted that network savings would generate $26 billion of an expected $43 billion in savings from the merger.

"Then, you've got $11 billion of that, that is sales rationalization, it's back office rationalization. You've got $6 billion that is IT (information technology) and spending," Legere said, according to a CNBC transcript of the appearance.

Investment analyst Walter Piecyk told his clients that "employee reductions" would be required for the new T-Mobile to claim $6 billion a year in cost savings as the companies promised Sunday. He also threw cold water on the second-headquarters notion.

"We believe the plan for 'second headquarters' in Overland Park is nothing more than a way to secure support for what is likely to be a difficult regulatory approval process," said Piecyk of BTIG Research.

Even as Sprint headquarters employees position for new-T-Mobile jobs, they have to remain valuable and loyal Sprinters. The merger lies a year or so away and CEOs of both companies said they will have to compete during that interim.

Sprint, for example, has embarked on a $6 billion expansion of its network this year and can't afford to let that slide in case regulators reject the merger.

Sprint shareholders soon will realize that their stock's price is tethered to whatever investors are willing to pay for T-Mobile's stock.

T-Mobile isn't paying cash for Sprint's shares but offering its own shares in the deal. Sprint shareholders will receive one T-Mobile share for every 9.75 Sprint shares they own.

The swap ratio recognizes that T-Mobile shares trade at a higher value than Sprint's. It also means Sprint shares' value is tied to the value of T-Mobile shares.

Sprint shares likely will gain relative to T-Mobile shares when prospects for the merger strengthen, and fade when the merger faces obstacles.

Mark Davis | 816-234-4372 @mdkcstar