The merger arbitrage spread on T-Mobile (NASDAQ:TMUS) shares has surprisingly widened as of late, with the stock price moving away from the said deal price of about $40 a share, indicating market concern that the proposed purchase of T-Mobile by Sprint (NYSE:S) may face serious antitrust challenges by regulators. However, if the deal does clear of government scrutiny and win their approval, which is argued as such here, at recent prices of below $34, arbitrage traders who have bought the shares could make a fat profit, a potentially near 20 percent return till a supposed deal announcement in a few months. While seeking a larger spread may sound prudent, worries over a potential deal collapse by some traders may prove to be unnecessary.
Unlike the earlier failed attempt to acquire T-Mobile by AT&T (NYSE:T), which would have created a mega-cap telecommunication giant, possibly even surpassing Verizon in market capitalization, a successful sale of T-Mobile to Sprint will form a combined entity likely just a third the size of AT&T and in an even smaller proportion to Verizon (NYSE:VZ). Thus, it's difficult to argue that combining Sprint and T-Mobile will trigger some genuine monopoly concerns and warrant an antitrust investigation, given the much larger market presence of AT&T and Verizon. To the contrary, even with the addition of T-Mobile, will Sprint finally become an able competitor to the two industry leaders?
For years, Sprint has been a distant third to AT&T and Verizon. Exiting the local landline telephone business probably didn't help Sprint when it came to leveraging economy of scale, considering that the better-performing AT&T and Verizon have found their way of managing both the wireless and landline business. Sprint traces its origins to a Kansas telephone company founded in 1899, but after spinning off its landline assets in 2006, Sprint became better known as a wireless player, forfeiting new landline opportunities in wired Internet. Even after the major addition of Nextel's wireless business, the Sprint name has gone only so far. The change of a large portion of the company's ownership to Softbank hasn't fundamentally altered Sprint's relatively weak position in the U.S. wireless market.
The cash infusion from issuing new shares to Softbank, part of the ownership-change arrangement, probably is what can really help Sprint in catching up to its stronger competitors. Without available investment capital, it'd be very challenging for Sprint to acquire other wireless assets and expand its operating capacity. Deals such as the company's cash purchase of its not-yet-owned shares of Clearwire, a growing wireless broadband operator, are something that will drive up Sprint's competitive capability. But AT&T and Verizon have been far more aggressive when it comes to consolidating their market positions, as both companies have scooped up numerous smaller wireless players along the way.
AT&T's wireless operation today is far from that under the old AT&T Wireless, which has seen its initial merger with Cingular Wireless, later acquisitions of Cellular One, Centennial, NextWave, the Altel brand and the latest $1.2 billion purchase of Leap Wireless. In a way, that's partly how large wireless carriers can grow their business more effectively, and it hasn't been much different in how Verizon Wireless has come to its current, dominant existence.
It's well known that Verizon Wireless started as a joint venture between Bell Atlantic, the predecessor of Verizon Communications, and the UK-based Vodafone, with the two companies contributing their respective U.S. wireless assets: Bell Atlantic Mobile and AirTouch Paging. But the initial venture has gone on with a lot more undertaking to buy other regional wireless players en route to becoming the largest wireless operator in the U.S. today. First, the venture added GTE Wireless soon after its initial operation when Bell Atlantic and GTE merged to become Verizon Communications. Then, over the years Verizon Wireless acquired West Virginia Wireless, Rural Cellular, Ramcell in Oregon and SureWest's wireless operation, among others, all smaller players and divested wireless assets by competitors in some pockets of the wireless market.
Consolidation has seemingly become a business pattern in the success of AT&T and Verizon, and will be followed as an industry-wide model by other companies like Sprint. It's fair to say that in wireless communications, companies both build and buy their way to becoming more competitive in the field. As market leaders, AT&T and Verizon can offer customers more comprehensive services, but small companies may pick up certain segments of the market left underserved. For example, MetroPCS for years had simpler calling plans better suited for starting cell-phone users. When T-Mobile had the resources to further build its wireless capacity, the easy way to do was to buy up MetroPCS, whose smaller size was a right complement for T-Mobile, and the consolidation also benefited MetroPCS. As much as small wireless companies can fill some market voids, they generally have limited growth prospects because of lacking sufficient capital for continued infrastructure investments.
Smaller wireless carriers come and go as a result of both their ability to meet certain unmet consumer demands early on and their becoming targets later in continued market consolidations. At their respective level of market capitalization, neither Sprint nor T-Mobile alone can take on AT&T and Verizon on all fronts. It's only logical that by consolidating their market holdings, Sprint and T-Mobile can move up the industry ladder and make the entire wireless business more competitive. The continual emerging of small, local wireless carriers and ongoing market consolidations by bigger companies are what actually is at work in the wireless communications market. Combining Sprint and T-Mobile is just another attempt in wireless consolidations.
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