The reports out of Wall Street on Tuesday were that two wireless telecommunications giants, T-Mobile and Sprint, were in negotiations on a potential merger. The reporting from CNBC has been great on this topic, and according to that trusted news source, there has been no exchange ratio determined to this point.
That is an indication that talks are still in an early stage but CNBC also added that the negotiations on the term sheet had begun. The period of term sheet negotiations can lag for a while or move relatively quickly depending on the parties involved in the potential merger. I have covered mergers where the meetings to figure out the parameters of the term sheet could get contentious, obviously much of that is centered around the valuation of given assets in the deal.
These two particular companies have discussed joining forces at least a few times in the past several years. The difference between those prior attempts and this potential merger opportunity is that the current proposal is expected to be an all stock transaction. The prior attempts at merging the two companies involved cash which brings in other variables around valuations of certain other operational components.
The main reason that these two mobile phone service providers are seeking to merge is one of the usual reasons: cost synergy. That rationale has come up often in my prior writing on M&A activity, and this deal stands to provide billions of dollars of cost savings due to the synergies involved in these businesses.
T-Mobile and their parent company, Deutsche Telecom, would become the lead party in the combined company. This translates to the average person to mean that if the two companies did link up – the combined company would be known as T-Mobile. It is too early to know, and it is unclear whether it will change, that they will keep the two names in the marketplace operating essentially as different brands with the same parent owner.
Sprint and their parent company, Softbank, expressed interest to work a deal with T-Mobile again earlier this year. The sources around the negotiations state that the understanding is that the CEO of T-Mobile, John Legere, would lead the combined company.
However, it is also being reported that the top guy at Softbank, Masayoshi Sun, wants a position of significant input into the daily operations of the potential combined entity. This scenario, in my experience covering mergers, always presents a whole other set of complications to the deal being completed.
In addition, it should be noted that the personnel involved in researching this type of transaction at T-Mobile has not begun their review of the balance sheet at Sprint. This review could (and very often does) change the terms of the structure of the deal. It also could become a factor in T-Mobile backing out of the process if it is determined that the current financial picture at Sprint is not advantageous for M&A activity.
Furthermore, the other variable which cannot be underscored is the anti-trust situation. The regulatory aspect from the federal government entities involved in a merger of this magnitude can frequently create several hurdles that could sidetrack a potential deal to the point that it never materializes.
In this case, we are dealing with a significant alignment of the third largest and fourth largest mobile telecommunication companies in the United States. The scrutiny from the federal anti-trust regulatory authorities is going to be significant. That level of scrutiny usually causes one side of the potential merger to disband the process. The possibility that T-Mobile could bow to the pressure exerted by federal regulators and pull the plug on this deal is one potential outcome of this situation.
The motivating factor for both T-Mobile and Sprint is a common one: remain competitive with the top two players in the industry, Verizon and AT&T. Those two behemoths keep getting larger and more diversified in their holdings with Verizon recently acquiring Yahoo and AT&T obtaining more media companies to go along with their blockbuster merger with DirecTV.
The pricing, network coverage, and service options (AT&T bundles services with DirecTV packages, Verizon bundles cell phone plans with FIOS TV packages) makes for competitive disadvantages for T-Mobile and Sprint. It is my belief that if T-Mobile and Sprint joined forces that the branding message would be crafted around their focus on mobile devices and the fact that they are not involved in other businesses in media.
It is very early in the process for this potential merger, anything could break one way or another with regard to the probability of it being carried to fruition. The fact remains that beyond all the “straight talk” the companies are engaging in at this point with the term sheet, is that this merger has several boundaries to overcome.
The stock valuations on the term sheet, the fact that both holding companies do not totally own all of the companies they are trying to consolidate, the role of John Legere versus Mr. Sun and his “seat at the table” demands, the balance sheet health of Sprint, and the anti-trust pressures; are all factors that could derail this deal off the tracks at any point.
The average consumer should keep tabs on this merger because it could further limit the competition and the competitive balance in the cell phone marketplace. This could lead to unfair or burdensome cost increases to the consumer and a lack of choice in their carrier. It effects an area that hits close to home to a great majority of the American public: their cell phone.
In the end analysis, it is going to come down to the same set of factors that most M&A activity revolves around: is the cost savings from the synergies obtained from consolidation worth the effort, headache, and manpower hours needed to complete the merger. The next few months will provide many of those answers as T-Mobile and Sprint move forward in this long process that merits the attention of the consumer.