The T-Mobile/Metro PCS (PCS) merger, by most accounts, left Sprint (S) in a weak position with few strategic options in an increasingly consolidated U.S. wireless industry. After the aforementioned merger, Sprint, by many opinions, would:
- lack a viable and attractive alternative to Metro PCS for a merger
- face an uphill battle to increase its customer base
- be hamstrung by its debt levels
- not be able to expand its high speed LTE network and would not have the cash to bid for spectrum as it became available
These opinions, however, were formed on the assumption that Sprint would remain a standalone entity.
Softbank's (SFTBF.PK) offer price of $7.30 takes care of the issue of shareholder value, and provides a good ROI at recent stock prices. Current management was already a favorite of many analysts prior to the M&A activity and the stock price had appreciated about 60% since July.
The reported cash infusion of $8b immediately helps Sprint rid itself of debt and debt obligations that burdened its balance sheet and reduced its flexibility and cash at hand. The cash infusion should provide the ability to procure loans at better terms and increase Sprint's flexibility to pursue strategic and tactical options to drive revenue and competitiveness.
The new Sprint combined with Softbank's Japanese operations ought to be able to leverage its size to procure equipment and phones at favorable prices, negotiate better terms with original equipment manufacturers (OEMs) such as Apple (AAPL), and cross-pollinate best practices. Masayoshi Son, the CEO of Softbank, expressed dismay at US wireless speeds, but also stated that he expects synergies across the two companies in the development of new technologies and offerings. Son's initial statements, if nothing else, are indicative that he intends to ramp up technology to position the new Sprint to compete in different ways than it does today.
Finally, the merger of the two companies is a much needed fillip for Sprint. They would have found it increasingly difficult to deal with the duopoly of Verizon (VZ) and AT&T (T) on the higher end and a more powerful T-Mobile on the lower end.
What happens when your owner takes a loan to buy you over and pay off your loans? Not exactly a whole lot if the new company is not in a better competitive position. The financial mechanics of the deal is very convoluted and unclear to the untrained eye. Complication, lack of clarity, and lender expectations will provide a small window after which revenue is expected to trend up to meet covenants or obligations.
Issuance of new stocks to Softbank, new ownership/control structure, and a tender for some of the existing stocks opens up a possibility of dilution down the road. This problem can be exacerbated if expected benefits are not obtained, leaving equity as a more attractive option for Softbank to acquire funds to service debt or procure cash.
The competitive landscape and the inherent issues for Sprint in the US market still remain:
- The need to expand LTE base
- Inadequate spectrum for growth
- Apparent duopoly in AT&T and Verizon
- Limited offerings in comparison to referenced segment leaders
- A more potent direct competitor in the new T-Mobile
Sprint had few obvious strategic options after T-Mobile moved for Metro PCS. The merger with Softbank provides a platform that opens up alternatives like the recent shift in ownership stake in Clearwire (CLWR). Sprint's ability to innovate, good management and maintain revenue growth, combined with shedding of its legacy businesses, made Sprint an attractive market entry option for Softbank to the U.S. market.
What this deal does not do for Sprint is change its brand position as a value brand. This deal does not change the position of the new Sprint in key areas (customer count, technology advancement, ARPU and churn rate) against Verizon and AT&T in the US wireless space. As opposed to Sprint, these industry leaders offer cable and other integrated solutions in addition to wireless services. T-Mobile will also become a more potent competitor in the value space with the acquisition of Metro PCS.
|Carrier||Subscribers (Millions)||Net Adds (Millions)||Churn (Avg Monthly)||ARPU|
|Sprint T-Mobile Metro PCS||98.644||1.391|
|Source: Fierce Wireless|
This deal does not eliminate any competitors in the marketplace; hence, it does not fundamentally change the competitive dynamics. From an ownership standpoint, the deal gets Sprint in similar ownership situations with Verizon Wireless which is 45% owned by Vodafone (VOD) and T-Mobile which is fully owned by Deutsche Telekom (DTEGY.PK) of Germany.
So what happens if Sprint gets more cash today? What happens if shareholders get a $7.30 tender? What happens if new Sprint's competitive position goes from worse to OK?
This deal does not change the dynamics in the U.S. wireless industry in the short or medium term. It buys Sprint time while providing an opportunity for shareholders who struggled with a depressed stock price to cash out.
Consider the hypothetic alternate scenario of a combined Sprint, T-Mobile and Metro PCS (see chart above). This new entity would have a customer count of about 99M, which is much closer to the 109M and 103M of Verizon and AT&T, respectively. It would also have comparable LTE coverage and spectrum which are critical in determining the offerings, hence revenue. Even though this scenario currently seems farfetched, it remains a medium term option that Softbank could explore and an option which will get FCC and department of justice approval as the new entity will not become a dominant player in the industry.
Disclosure: I am long S. I plan to sell S at the tender of $7.30.