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Talks between two non-U.S. carriers are well along in paving the way for a merger of two U.S. wireless companies. The two companies, Softbank of Japan and Deutsche Telekom of Germany, have apparently agreed that Softbank will buy a majority of shares in T-Mobile U.S. via its Sprint subsidiary.
According to unsourced stories released by the Nasdaq and Nikkei markets over the weekend, both companies have reached a basic agreement and Softbank has lined up the required financing through a consortium of Japanese and U.S. banks to come up with the $39 billion it will take to cover the full cost of the deal.
The shares being bought from DT will cost Softbank an estimated $32 billion. There are still details to be worked out, including a $2 billion break-up fee demanded by T-Mobile U.S. That break-up fee would be paid to T-Mobile if the merger fails.
You may remember that T-Mobile benefitted hugely from the nearly $4 billion break-up fee paid by AT&T when its merger ran afoul of regulators three years ago. This effort to merge Sprint and T-Mobile gathered steam following a renewed PR effort by Softbank in June. However, Softbank actually started its efforts to add T-Mobile to its telecom stable in 2013, shortly after Softbank completed its purchase of Sprint.
What’s going on here is that Softbank CEO Masayoshi Son wants a bigger chunk of the U.S. wireless market than he can get by just owning Sprint, especially with Sprint’s fortunes in decline as its Long Term Evolution (LTE) rollout fumbles.
There’s little doubt that Son has looked on the activities of T-Mobile CEO John Legere with admiration as he’s taken on his much larger competitors and continues to win. It seems clear that what Son wants is Legere running a much larger T-Mobile that he owns.
And that’s exactly what the plan seems to be. While neither Softbank nor Legere have confirmed that there’s a plan in place to put him in charge of Sprint, he’s also made it clear in comments as recently as the T-Mobile’s “Un-Carrier” announcements in June that he thinks the approach could work with other mobile carriers besides T-Mobile. The current plan, according to a variety of press and analyst reports, seems to be that T-Mobile would be the surviving corporation if the merger clears all the hurdles.
The resulting picture is that of Sprint going away, with the new company being called T-Mobile U.S. John Legere would be the CEO of the combined company. The marketing program, the whole Un-Carrier thing, would continue as it is now, but more so. But a number of questions remain.
The most pressing question, especially for customers, is how to integrate the disparate wireless technology that the two companies use.
Sprint, T-Mobile Merger Talks Continue as Softbank Pushes for Deal
T-Mobile is a GSM carrier. Sprint is a Code Division Multiple Access (CDMA) carrier. Although it’s possible to operate both technologies at least for a while, eventually one or the other must prevail, if only because of the costs involved with operating both types of networks at the same time.
When T-Mobile took over the smaller MetroPCS, those customers were moved to GSM as their devices needed to be switched out. But what will happen with Sprint and T-Mobile? With Sprint being the larger company with the most customers, you’d assume that T-Mobile customers would be forced to move to CDMA, but perhaps that wouldn’t happen in this case.
The reason it might not happen is twofold. First, Sprint was already planning to switch out customer devices so that they would work with the new Spark LTE when it came online. Now they would still switch devices, but it would be to GSM/LTE devices instead.
In addition, it’s a simple process for T-Mobile customers to simply move to arch-rival AT&T if they don’t want to do business with the combined companies. All that’s required is to change to a new SIM card. Sprint customers can’t simply switch to the other CDMA carrier, which is Verizon because the frequencies aren’t necessarily compatible.
What that means is that the process of changing out the devices for former Sprint customers has much lower risk than changing former T-Mobile customers to CDMA, especially for those customers who signed on for the ability to use their devices overseas with unlimited data. After all, T-Mobile’s phones and devices will work anywhere in the world, but most of Sprint’s won’t.
But leaving aside all of those questions, there’s still the elephant in the room. Make that two elephants, once named the U.S. Department of Justice and the other named the Federal Communications Commission. For any purchase that would combine Sprint and T-Mobile into a single carrier, regardless of its name, those two agencies have to be convinced that it’s in the best interests of customers and that it wouldn’t reduce competition.
The inability to satisfy the DOJ and the FCC that a merger would be in the best interests of consumers and wouldn’t hurt competition is what doomed the merger with AT&T. Since that merger failed, T-Mobile has shown a remarkable ability to compete and begin to overtake larger competitors. Would that continue if there were fewer companies, and Sprint was the owner?
It’s going to be difficult for these two foreign companies to prove to the regulators that dividing up the U.S. wireless market to suit themselves is in the best interest of U.S. consumers. The way things look right now, I don’t think they’ll be able to pull it off, Softbank’s PR campaign notwithstanding.