Sprint Corp has held talks with six banks to discuss potential financing structures should it make an offer for rival operator T-Mobile US, owned by Deutsche Telekom. The talks were designed to lay the groundwork before Sprint makes a formal offer which…
Sprint Corp has held talks with six banks to discuss potential financing structures should it make an offer for rival operator T-Mobile US, owned by Deutsche Telekom.
The talks were designed to lay the groundwork before Sprint makes a formal offer which could come in June or July, people with knowledge of the situation told Bloomberg.
Sprint’s CFO and its treasurer reportedly met with bankers from Goldman Sachs, Citi, JP Morgan, Mizuho, BofA Merrill Lynch and Deutsche Bank to work out how much it should borrow.
The Softbank-owned operator would like to fund the majority of T-Mobile’s estimated US$50bn consideration with corporate bonds, and the rest with syndicated loans and convertible bonds, according to a Reuters source.
However, no financing commitments have been signed and Softbank’s CEO Masayoshi Son – who is masterminding the takeover – has not settled on how the acquisition would be funded.
A tie-up between the two companies would see the number of nationwide wireless network operators in the US fall from four to three and regulators have already made noises that they are not keen on a deal.
Sprint and T-Mobile executives have argued that they need to gain scale to compete with the big two players in the sector, AT&T and Verizon Wireless, which they have referred to as a duopoly.
Sprint wants to pursue the deal while the Department of Justice and Federal Communications Commission are also reviewing Comcast’s acquisition of Time Warner Cable, which will unite America’s two largest cablecos. Sprint hopes that regulators will see both deals as changing the telecommunications industry, sources cited in the Bloomberg report said.
Bernstein Research analysts agreed with Sprint’s thinking behind the timing. “With the mega cable merger going on it is the right time (if ever there is one) to make a grand sweep argument about the changing nature of the US telecom and cable market and the need for the regulator to think in the long term for sustainable competition.”
Bernstein said it was very hard to know if any deal could pass, but since US cable looks set to change so dramatically a more conservative approach to mobile consolidation could leave “enfeebled wireless competitors”.
The analysts suggested that remedies involving Dish Network, whereby the DTH provider could utilise its spectrum using Sprint/T-Mobile’s network and start offering mobile services, could help to convince regulators to green light the deal.
Craig Moffett, senior analyst at MoffettNathanson, posited that Softbank’s continued pursuit of T-Mobile – and AT&T’s new approach for DirecTV – are the result of regulators appearing to entertain consolidation in cable, between Comcast and TWC. “One deal begets another,” he expalined.
Moffett suggested that talk of these deals may lessen the chance of the Comcast/TWC deal being passed in its current state, as Washington risks being accused of “playing favourites”.
A Sprint/T-Mobile merger had “extremely low odds of success” if it came in front of regulators.
New Street Research analyst Jonathan Chaplin was similarly minded. “We think the odds of a deal in the next 12-18 months are low (a deal is ultimately likely; just not now).”
He said he would hold off buying stock until regulators have a change of heart.
In spite of the high regulatory risk a deal carries, Son is said to be against including a large break-up fee in any deal as he feels it could give the regulators an incentive to block the merger.
When AT&T’s attempt to take over T-Mobile in 2011 was obstructed by regulators, AT&T paid T-Mobile US$6bn in cash and spectrum assets, recapitalising the business and making it a stronger challenger. Son is reported to have viewed that as a strategic mistake by AT&T.
In a note Nomura analyst Frederic Boulan recommended DT forego a significant break-up penalty, but wasn’t sure they would heed that sort of advice.
“Upside in a merger for both Sprint and T-Mobile is significant and in our view DT should accept to share the antitrust risk to a degree by not asking a large break-up fee, but we believe DT remains quite focussed on this and it points to how bad TMUS performed during the AT&T/T-Mobile review process.”
Sprint declined to comment on the reports while Deutsche Telekom did not reply to a request for comment.
T-Mobile has a market capitalisation of US$23.5bn and US$8.7bn in long-term debt, reporting a net debt to adjusted EBITDA ratio of 3.0 in its Q1 results, while Sprint boasts a market cap of US$33.45bn and US$26.5bn net debt.
Combined, the two operators have less than 100 million subscribers, while both AT&T and Verizon have more than that figure.
