Over the last couple of weeks, the U.S. wireless communication industry has been subject of many rumors about possible industry consolidation. The major players involved in the talks are MetroPCS (PCS), T-Mobile USA and Sprint Nextel (S). Today, Japanese Softbank emerged as a possible contender as well, creating a surprising twist to the consolidation talks.
T-Mobile USA and MetroPCS talks
Last week MetroPCS's shares rose after the company was in exclusive talks with Deutsche Telekom (DTEGY.PK). T-Mobile USA, the problem child of Deutsche Telekom, wanted to acquire MetroPCS to boost its position as the fourth largest U.S. wireless carrier. Last year, a $39 billion deal to sell T-Mobile USA to AT&T (T) failed on anti-trust concerns. Since then, Deutsche Telekom has been exploring its options for the troubled U.S. unit.
Sprint Gets Involved
The third largest U.S. carrier, Sprint responded to the talks and its CEO Dan Hesse called the board of directors to discuss the company's second attempt to acquire MetroPCS in 2012. If T-Mobile USA and MetroPCS would be combined, the market position of Sprint as third largest carrier will be threatened. MetroPCS's 9.3 million subscribers and T-Mobile's 33.2 million subscribers, would have reinforced T-Mobile's fourth largest position in the U.S. Combined, the entity would have 42.5 million subscribers.
In comparison, Sprint has about 56 million subscribers, still roughly half of that of the industry leaders AT&T and Verizon Communications (VZ).
Many commentators argued that a deal between MetroPCS and Sprint would not be likely given the deeper pockets of T-Mobile USA and the exclusivity of the talks. Furthermore, Sprint would have to pay T-Mobile USA a break-up fee of $150 million.
There was a whole lot of action in Thursday's trading session. The big winner on the day was Sprint, who saw its shares rise by over 14% to $5.76 per share. On Wednesday, Sprint's board of directors held back on making a bid for MetroPCS. On Thursday it became all too clear why.
According to reports in the press, Japanese Softbank is willing to make a $19 billion offer for Sprint Nextel's shares. No definitive prices have been confirmed, but according to Japanese newspapers the Japanese company might be willing to pay $6.50 per share.
Softbank would buy a controlling stake and possibly make a direct investment in Sprint itself. Softbank would gain control and improve Sprint's financial position. Sprint currently carries a net debt position of $21.3 billion. Besides making an offer for Sprint, Softbank might be willing to make an offer for Clearwire Corporation (CLWR) which traded with gains of 70.7% on Thursday. Sprint Nextel holds a 48% stake in Clearwire.
The "grande" plan is to eventually create an operator with a strong financial position which in the long term could buy T-Mobile USA, possibly including the operations of MetroPCS.
MetroPCS Is Losing Out
The clear loser in the latest developments is obviously MetroPCS. The emergence of Softbank as a bidder for Sprint Nextel creates less competition for MetroPCS. Shares of MetroPCS lost more than 3.3% in Thursday's session.
Investors in MetroPCS were hopeful that Sprint would emerge as a competitive bidder for the company. Sprint recently increased its financial power, despite the substantial debt position. Sprint's shares have risen some 150% already in 2012, boosting the equity of the firm as deal-making currency. Sprint's market capitalization has risen to $17.3 billion in the meantime, compared to a capitalization of $4.2 billion for MetroPCS.
Investors treat the interest of Softbank for the U.S. market, and Sprint in particular, as very serious. The largest players in the market, AT&T and Verizon Communications, fell 1.8% and 1.3% in Thursday's trading session, respectively. The move of Softbank could create a sizable third competitor for the two largest carriers.
Expect more rumors in the following weeks. After years of takeover rumors, the industry seems to have finally started its consolidation phase. By now, it is obvious that MetroPCS will lose its independence in the coming time period. However, the industry might just witness two large deals in the next period.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.