Sprint Corp has agreed to pay around US$40 per share to acquire T-Mobile US, which values it at US$32bn and is a 17% premium on the target’s closing price yesterday, according to a variety of reports from the US. T-Mobile’s parent, Deutsche Telekom,…
Sprint Corp has agreed to pay around US$40 per share to acquire T-Mobile US, which values it at US$32bn and is a 17% premium on the target’s closing price yesterday, according to a variety of reports from the US.
T-Mobile’s parent, Deutsche Telekom, is expected to keep a 15% to 20% stake in the combined operator.
Sprint will split the consideration it offers 50/50 between stock and cash, the reports said citing people familiar with the matter.
The parties also agreed a break-up fee, reported to be more than US$1bn in cash plus other assets. Masayoshi Son, chair of Sprint’s parent Softbank, was said to have been wary of setting a high termination fee. He felt the US$6bn AT&T pledged to pay T-Mobile in its doomed takeover attempt in 2011 gave regulators an incentive to block the merger as the proceeds from the break fee would lead to a stronger fourth player in T-Mobile.
No deal before July
In spite of shaking hands on the broad financial terms, an announcement is not expected before July at the earliest. This is because the operators have to develop their arguments in favour of a deal, which at this point appears more likely to be rejected by regulators than accepted.
Part of their case will be presenting to the authorities how the companies’ future’s will pan out if they remain independent compared to if they join forces, although these models are still being worked on.
The operators see an opening to put their deal in front of regulators following mega-transactions between AT&T and DirecTV, and Comcast and Time Warner Cable.
If these transactions are approved by the regulator then America’s number three mobile operator, Sprint, would be left as a smaller player than it already is in the wider sector.
The operators will also argue that AT&T and Verizon Communications represent a duopoly in the market – both with more than 100 million subscribers – and that they are only getting stronger.
Sprint and T-Mobile are thought to believe that the FCC’s rules for next year’s spectrum auction – which do not help the two operators as much as expected – also strengthens their hand, so they can argue that they are not getting enough help to compete. The regulator has previously expressed a preference for a four-player mobile market.
While the regulators are the most significant barrier to a merger, the parties still have a number of other issues to iron-out. Neither operator has conducted due diligence on the other, financing has not been arranged, and a definitive agreement has not been drawn up.
Legere tipped for CEO role
A leader for the combined merger would also have to be chosen. In a note to investors BTIG Research analyst Walter Piecyk suggested that T-Mobile CEO John Legere was more likely to get the post than Sprint’s Dan Hesse.
“Masa Son spoke kindly of T-Mobile CEO John Legere at the recent Re/Code conference without even mentioning his own CEO Dan Hesse and Hesse was not present at Masa’s presentation to the Chamber of Commerce in March,” Piecyk wrote.
“Even Dan Hesse himself appeared to be willing to cede his job as part of a merger,” he added, referencing an interview where 60-year old Hesse said it wouldn’t bother him if he didn’t run a combined Sprint/T-Mobile and had other things he wanted to do.
MoffettNathanson Research analyst Craig Moffett puts the chances of a merger being approved at only 10%.
“Every investor has heard everything there is to hear about the merits of a merger. That there needs to be a strong third. That Sprint and T-Mobile aren’t independently viable. That Sprint will be a ‘super maverick’. That Sprint/T-Mobile can be a fourth giant to counter the new three kings of internet access – Comcast, Verizon, and AT&T,” he wrote.
“But here’s the thing: the DOJ (Department of Justice) and FCC have heard all those arguments too, and they fully understood them long before they went on record with their scepticism.”
He said it was absurd to think that the regulators were just waiting for Softbank and Sprint to articulate the arguments. Sprint’s share price has fallen as much as 6% today and T-Mobile’s stock dropped 1.5% as investors digest the news.
