By Surya Kongara, Karthik Neelamegam and Adit Rajeev (University of Cambridge) 03/12/2018 |
Overview of the deal
Acquirer: T-Mobile
Target: Sprint
Estimated value: $26.5bn
Announcement date: April 29, 2018
T-Mobile Advisors: Credit Suisse, Deutsche Bank, Evercore, Goldman Sachs, Morgan Stanley, PJT Partners
Sprint Advisors: Centerview Partners, JPMorgan, Raine Group
T-Mobile and Sprint have agreed to merge in a $26.5bn all-stock deal. The combined company will have an estimated enterprise value of $146 billion. The deal is expected to close in Q1 of 2019, even against the backdrop of inquests by the Department of Justice who are currently reviewing the antitrust implications of the merger.
In fact, this deal would be the third attempt at merging the two companies. The companies abandoned a merger attempt in 2014, when the Obama antitrust regulators blocked it. In the public interest statement, the companies promised to bring rural Americans better broadband coverage with improved signal quality and increased network capacity, alongside lower prices, innovation and job growth. Most significantly, the company intend to build a “world-class nationwide 5G network” that will surpass Verizon and AT&T. This would be pivotal in telecommunications, and promises the combined company to be a leader in the industry.
“The new T-Mobile will have the network capacity to rapidly create a nationwide 5G network with the breadth and depth needed to enable U.S. firms and entrepreneurs to continue to lead the world in the coming 5G era” -T-Mobile
Company details (T-Mobile)
T-Mobile is the mobile communications subsidiary of German telecommunications company Deutsche Telekom AG. The company offers voice, messaging and data services, and wireless devices. It is the third largest carrier in the US, with a consumer base of 75.6 million.
- Founded in 1994, headquartered in Bellevue, Washington
- CEO: Mr. John J. Legere
- Number of employees: 51,000
- Market Cap: $58.3bn - EV: $88.1bn
- LTM Revenue: $42.6bn - LTM EBITDA: $11.3bn
- LTM EV/Revenue: 2.1x - LTM EV/EBITDA: 7.8x
Company details (Sprint)
Sprint is a telecommunications company providing wireless and wireline communication services and products to customers. It is the fourth largest carrier in the US, with a consumer base of 53.6 million.
- Founded in 1899, headquartered in Overland Park, Kansas
- CEO: Mr. Michel Combes
- Number of employees: 30,000
- Market Cap: $25.9bn - EV: $57.7bn
- LTM Revenue: $32.9bn - LTM EBITDA: $12.7bn
- LTM EV/Revenue: 1.8x - LTM EV/EBITDA: 4.5x
Projections and assumptions
Short-term consequences
The combined entity is to be called T-Mobile, and lead by T-Mobile CEO John Legere, whilst Sprint CEO Marcelo Claure and SoftBank Group Chairman & CEO Masayoshi Son will serve on the board. Deutsche Telekom, the parent company of T-Mobile, will own 42% of the resulting company, while SoftBank, the parent company of Sprint, will own 27%. The remaining 31% will be publicly owned.
Projections indicate the combined company will exceed 126 million customers, drastically boosting its ability to compete against AT&T and Verizon who have 141 and 150 million subscribers respectively. T-mobile claim this transaction actually increases competition/pressure on Verizon and AT&T (because T-mobile is now a much larger threat to their market shares) and is likely to reduce consumer prices across the industry. With a history of having price-conscious consumers, the firm’s positioning is consistent with its motives of putting customers first via low prices.
Legere pledged to invest c. $40 Billion into infrastructure to roll out 5G networks before competitors - this investment is 46% more than T-Mobile and Sprint spent combined in the past three years. The immediate societal gain of this massive capital outlay will be significant, especially since T-Mobile are seeking to employ at least 200,000 people in the US in support of this; this could help sway the Trump administration to favour the deal. In strategic response, we can expect to see competitors accelerate their investments, further fuelling job growth in the industry.
Long-term consequences
With the new T-Mobile’s combined bandwidth and $40B investment, it could deliver nationwide 5G more quickly than either standalone company, solidifying its lead in the race to 5G. By 2024, it is forecast that the assets of the 2 companies can generate 8 times the 5G capacity, and 15 times the speed that either company could do alone. This expansion of faster internet would allow for providing better education, huge upside for investors, and remote job opportunities for rural areas currently with slow speeds and high prices.
The new T-Mobile’s 5G network would provide mobile broadband speeds greater than 100Mbps to roughly two thirds of the population, and approximately 90% by 2024. Significantly, this could lead to Americans ‘cutting the cord’ from Comcast, Charter, etc., and pocket savings of roughly $80 a month from terminating wired in-home broadband subscription. T-Mobile COO and President Mike Sievert forecasts an increase of 1.9 million in-home wireless broadband customers by 2021 and 9.5 million customers by 2024, making it the nation’s fourth largest in-home ISP by 2024. Half a million of these customers are expected to be in rural areas, thus advancing the development impetus that 5G will have beyond just urban cities.
For 2018, the firms’ combined revenues are expected to lie between $75bn and $76bn. This is predicted to grow up to $86bn within the next 4 years due to revenue synergies from the greater 5G potential. Run-rate cost synergies are expected amount to $6bn, arising from R&D savings, eliminating redundant jobs, and saving on overhead costs.
Risks and uncertaintiesTransaction Consideration: An all stock purchase means issuance of additional shares. T-Mobile’s $9bn share buy back over the last 2 years mitigates this share price downside to an extent, but the net result is still ownership dilution. Pro Forma earnings will have to increase significantly for the transaction to be accretive to earnings per share. Although original T-Mobile shareholders will maintain majority voting rights post transaction, the issue is nonetheless important for shareholders and investors to consider.
Competition Considerations: Transactions of this scale are always subject to regulatory scrutiny. The history of the deal, and the Trump administration, express severe concerns regarding competition. The major carriers are currently split into 2 different types: companies that offer packaged services (i.e. AT&T and Verizon) and companies that do not (i.e. T-Mobile and Sprint). After the merger, there’ll be a single major firm in the latter, resulting in a monopoly situation with little competition and thus possibly an exploitation of this to charge premiums. The merger could also lead to Sprint’s low-cost alternative services being eliminated, leading to the 3 major carriers each offering expensive data plans with a potential for collusion.
Debt: With combined total debt of $61.8bn, the new T-Mobile would be significantly leveraged, thus increasing future borrowing costs and potentially limiting scope of business flexibility.
Management: Although John Legere will continue as CEO of the new T-Mobile, the remaining management team will be selected from both companies. Misalignments of vision and culture have a potential to impede the company's goal of becoming the largest telecoms company in the US.
“The pending merger of T-Mobile and Sprint presents regulators with a perfect opportunity to further propel the wireless success story in the United States. This is a story about ceaseless innovation, fierce competition, and incredible consumer gains, positioning mobile technologies at the center of American life” -Forbes
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