A T-Mobile sale has appeared inevitable for almost a year, following constant rumors that it’s in talks with Sprint, and more recently, when a little-known French telecom company made an out-of-the-blue bid.
But now, some analysts are making the case for the Bellevue, Wash.-based wireless carrier to hold off on a merger — at least for the foreseeable future. As negotiations wear on, a deal with Sprint is looking less likely, and it is starting to look more like T-Mobile has everything to gain by simply holding out.
“At this point, anything that reduces the chance of a shotgun wedding to Sprint is good news for T-Mobile,” wrote telecom analyst Craig Moffett in a research note, according to The Washington Post.
Of course, a sale could still be in the works, and delaying a sale would go against everything T-Mobile has been saying for months, which is that consolidation is the only way for it to compete with Verizon and AT&T over the long-term.
But here’s why a merger appears further away than it ever has been:
T-Mobile has started to turn things around, making a sale less urgent.
Last week, T-Mobile reported strong second-quarter earnings, achieving its fifth consecutive quarter of subscriber growth, and turning a profit of $391 million. T-Mobile’s net subscriber additions of 1.5 million are particularly impressive given that Verizon added 304,000 and Sprint lost 181,000 in the same period.
For the full year, T-Mobile now expects to add 3.1 million to 3.5 million subscribers as compared to the 2.8 million to 3.3 million it had originally expected.
At these rates, Moffett argued that T-Mobile’s value is rising while Sprint’s is falling, and “T-Mobile will pass Sprint in the number of post-paid phone subscribers in less than a year.”
A merger at this time could confuse and derail the progress T-Mobile has made in building a brand.
T-Mobile’s improvements are largely due to a series of moves by its outspoken CEO John Legere to shake up the conventions of the wireless industry.
Legere has implemented a series of new offerings over the past year as part of T-Mobile’s “Uncarrier” strategy, which has included shifting customers away from the long-term contracts, offering early upgrades, free international data roaming, and paying early termination fees for people who switch to T-Mobile. It’s also launched consumer-friendly programs, like offering a free iPhone for a week in a test drive, and unlimited data for streaming music.
Evercore analyst Jonathan Schildkraut argues that the company’s momentum is translating into a healthier balance sheet for the company as it builds up cash, which makes T-Mobile shares increasingly compelling with or without a deal.
Still, he sees a merger as the most likely outcome. He wrote in a note to investors that while T-Mobile is unlikely enthusiastic about the Illiad offer, “we believe it could serve as the impetus for a bidding war,” adding that Sprint is the more obvious winner.
Politics and break-up fees are two huge reasons why a merger may be on hold.
The Federal Communications Commission has been vocal about narrowing wireless choice down from four national carriers to three is bad for consumers. And, as you may recall, the government killed the AT&T’s purchase of T-Mobile in 2011 for this very same reason.
Both T-Mobile and Sprint have argued that together they will be able to offer a strong competitor to Verizon and AT&T, but this will be a harder argument to make with another offer on the table from Iliad, which is the fourth-largest provider in France with eight million subscribers.
Illiad has offered $15 billion in cash to T-Mobile for 56.6 percent of the company at $33 per share. The French telecom company, valued at $16 billion, noted that it would finance the cash purchase through a combination of debt and equity. This deal values T-Mobile at $30 billion. Sprint’s deal would pay around $40 per share for T-Mobile, valuing it at nearly $32 billion. It would require Sprint to raise debt in excess of $40 billion.
In this deal, you can expect Sprint to set forth a similar break-up fee, ranging between $2 billion and $4 billion in case the deal falls apart. If the odds of getting government approval are slim, that may be incentive enough for Sprint, and SoftBank, it’s majority shareholder, not go through with an offer.
Finally, there is political motivation to wait beyond the 2016 elections. The election could produce a more merger-friendly administration that would approve the Sprint-T-Mobile merger.
A merger is inevitable, and T-Mobile knows it.
While it would benefit T-Mobile to hold off on merging with another player, it’s likely that a buy-out of some kind eventually will happen. This is especially true, if you believe what the executives at T-Mobile are saying.
“I know what we’ve done in the last year-and-a-half is a small inkling of what real competition is like,” Legere told GeekWire in June. “In order to keep it going, there’s things we need in the long term — scale, spectrum, etc. And one way to get those is consolidation.”
Many of T-Mobile’s bold moves have been made possible because of the cash and spectrum it received from AT&T, but it will need more resources over the long-haul to be a nationally competitive carrier.
T-Mobile’s CFO Braxton Carter echoed those feelings in March when he said, “It is not a question of if, it is a question of when,” according to Reuters.