Reports indicate Sprint would pay $32 billion for T-Mobile

T-Mobile’s aggressive marketing and incentives to switch carriers appear to be reflected in its higher customer numbers.
T-Mobile’s aggressive marketing and incentives to switch carriers appear to be reflected in its higher customer numbers. Bloomberg

Sprint Corp. reportedly has worked out many of the terms for a $32 billion deal to acquire T-Mobile US Inc., according to varying accounts Wednesday.

Reports by Bloomberg News, The New York Times and The Wall Street Journal agreed that the deal would have Overland Park-based Sprint acquire controlling interest in the smaller T-Mobile. They disagreed about some of the details, including the degree to which T-Mobile’s parent company, Germany-based Deutsche Telekom, would remain a stockholder after a merger.

None of the reports identified its sources, citing only individuals with knowledge of the supposed deal.

The companies did not report any news of a deal, and a Sprint spokesman declined to comment.

A Sprint/T-Mobile annoucement likely won’t come until next month. Each company must perform detailed study of each others’ confidential financial and other information, work out a definitive agreement and arrange financing, The New York Times report said.

Sprint has been pushing for a deal that would add to its 54 million subscribers and allow it to more successfully challenge the much larger No. 1 Verizon and No. 2 AT&T. Buying T-Mobile would give Sprint about 92 million subscribers, or nearly as many as AT&T’s 94 million and Verizon’s 115 million, according to totals provided by Macquarie Equities Research.

A combination of the No. 3 and No. 4 U.S. carriers also would allow the companies to cut costs where they would have duplication, such as in retail stores, customer call centers or other areas. In that regard, a merger could have an important job impact in the Kansas City area, where Sprint is one of the largest employers.

According to all three accounts, Sprint would pay about $40 a share for T-Mobile stock. The value would involve a combination of cash and shares of Sprint, which Bloomberg said would be split evenly.

Shares of T-Mobile rose 8 cents Wednesday to close at $34.28. Sprint shares lost 10 cents and closed at $9.40. The reports of a deal came after the stock market had closed.

Deutsche Telekom would end up owning about 15 percent of the combined Sprint/T-Mobile company, according to Bloomberg, but 20 percent according to The New York Times. The Journal said the share is unsettled but between 15 percent and 20 percent.

Deutsche Telekom currently owns 67 percent of T-Mobile.

Sprint is 80 percent owned by Tokyo-based SoftBank Corp., which is the third-largest wireless company in Japan. Its chief executive, Masayoshi Son, who also is Sprint’s chairman, has pushed publicly for a deal to make Sprint a larger rival.

Any proposed deal would face intense review by the Federal Communications Commission and the U.S. Department of Justice. Washington regulators have been open about their preference for keeping the four national carriers in place.

The FCC already has two other large proposals under review. Comcast Corp. and Time Warner Cable Inc. seek a merger and AT&T wants approval to buy satellite television company DirecTV.

“All of a sudden it’s not just a matter of Sprint and T-Mobile, but now it’s several companies whose mergers would transform the entire industry. In this case I think regulators will look at Sprint and T-Mobile in a different light,” industry analyst Jeff Kagan said in an email.

In 2012, Washington blocked AT&T’s $39 billion agreement to buy T-Mobile citing the preference for what it considered a more competitive market. Sprint chief executive Dan Hesse had led a charge against the AT&T deal by saying it would further entrench the “duopoly” control that AT&T and Verizon have on the U.S. wireless market.

AT&T ended up paying T-Mobile a breakup fee negotiated as part of the deal. Sprint, according to the reports, would pay a $1 billion breakup fee if the deal were proposed but uncompleted, which could hamper Sprint financially.

Since the break up of the AT&T deal, T-Mobile has re-energized its business and won millions of new subscribers through aggressive pricing and marketing plans. These have included eliminating 2-year service contracts, selling phones separately from service, faster device upgrade policies and other deals.

Its success, for example adding 2 million subscribers in the first three months of this year, has been cited as justification to keep the four national carriers separate.

This week, however, AT&T told analysts that it has been losing fewer subscribers since the end of March. It suggests that T-Mobile’s gains may be weakening, analyst Adam Ilkowitz at Nomura said in a note to clients on Wednesday.

AT&T has been a favorite target of upstart T-Mobile’s push to lure customers to its network, in part because the companies use similar network technology. Ilkowitz said he expects Verizon also is seeing fewer customer departures, which the industry calls churn.

Less success at T-Mobile, Ilkowitz said, “underlines the rationale” for a deal with Sprint.

The Journal’s report said Sprint and T-Mobile also are considering forming a joint venture that would allow them to combine resources for an upcoming government auction of wireless spectrum.

Rules governing the auction, however, led another analyst Wednesday to say that Washington had fired “a shot across the bow” of the merger idea.

Spectrum are the licensed airwaves that mobile phones, tablets and other devices use to stream video, download apps and perform the other features that make the devices popular. Carriers have said the 600 megahertz spectrum to be auctioned next year is particularly attractive because it carries signals deeper into buildings and further before the signals need to be reinforced by another cell tower.

Here’s where the idea of a merger between Sprint and T-Mobile may have hit a new snag, according to analyst Jennifer Fritzsche at Wells Fargo Securities.

Fritzsche pointed to the FCC’s auction rules. One rule sets aside part of the valued 600 megahertz spectrum and excludes the two biggest carriers from bidding. It essentially means Sprint and T-Mobile would be the top contenders for that reserved spectrum.

Fritzsche then dug out the fine print in paragraph 171 of the rules. The FCC’s auction rules essentially assume there are four national carriers, she said in a note to clients.

“If significant changes in the marketplace structure occur or a proposed transaction is filed with the commission in the future affecting the top four nationwide providers and their spectrum holdings, we will revisit our decisions here regarding the reserved spectrum provisions for the 600 megahertz band that we adopt today,” Friztsche‘s note quoted the rules to say.

In her words: “We believe this language is very purposeful and could signal the FCC’s displeasure with the possibility of a Sprint/T-Mobile merger.”

Fritzsche’s legal sources tell her that the FCC basically has told Sprint and T-Mobile that if they ask to merge they’ll be cut out of the bidding on the reserved spectrum, just as AT&T and Verizon will be cut out.

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