Merger talks between Sprint Corp. and T-Mobile US Inc. could not get off the ground three years ago, but now analysts see reasons to lift hopes for a deal.
Top executives at the corporate parents of both companies recently expressed interest in trying to strike a deal. In an earnings conference call for Sprint parent SoftBank Group Corp., CEO Masayoshi Son said merging Sprint with T-Mobile is a "first priority." At T-Mobile parent Deutsche Telekom AG, CEO Timotheus Höttges was more circumspect, saying that from a conceptual perspective, "We like consolidation and we like convergence." Reports indicate Sprint and T-Mobile are exploring a possible combination.
Robert Bruner, dean emeritus of the University of Virginia's Darden School of Business whose published work includes multiple books on M&A, sees a number of reasons why the two companies have reignited interest in a deal, including the need for infrastructure investment. The move to next-generation 5G wireless service will require capital expenditures to upgrade and densify nationwide networks, he noted.
"At the core of this is … a desire to scale up and own more customer relationships and then upsell, cross-sell and down-sell those customers in ways that create even more value for the new company," Bruner said in an interview. "Locking in a larger customer base gives great comfort to companies as they contemplate major capital investments for new products and services," he added.
Kagan analyst Sharon Armbrust also believes the coming transition to 5G is a major factor.
"Right now is sort of the calm before the storm and I think it's probably a great time to do some M&A and get into a stronger position," Armbrust said in an interview.
Another factor, according to Armbrust, is the threat of new competition in the wireless space.
"The internet, telephone, cable and over-the-top players are all increasingly competing in the same area," Armbrust said, noting that Comcast Corp. and Charter Communications Inc. have teamed up to pursued wireless efforts, even as AT&T Inc. continues to push forward on its pay-TV and wireless OTT offerings.
"So I think what is going to become more obvious is we're not talking about a walled-garden wireless environment anymore," she said, noting this could impact how policymakers view the competitive landscape in the wireless market.
In 2014, under the Obama administration, a move from four nationwide carriers down to three was widely viewed as bad for competition. In August 2014, following news that Sprint had abandoned its efforts to combine with T-Mobile, Tom Wheeler, the former Democratic chairman of the Federal Communications Commission, said plainly, "Four national wireless providers are good for American consumers."
The current convergence between cable, wireless and internet, though, along with the new Republican administration, may change the calculus.
"It's definitely a completely different landscape politically," Armbrust said, adding, "The reins have been loosened on this strict and really outdated view on what competition is."
As it stands now, the U.S. wireless market is highly concentrated according to the Herfindahl-Hirschman Index, a key calculation used by regulators to measure market concentration before and after a proposed merger. The index is calculated by squaring the market share of each competing firm and then summing the resulting numbers. Markets in which the HHI is between 1,500 and 2,500 points are considered to be moderately concentrated, while markets with an HHI greater than 2,500 points are considered to be highly concentrated.
According to a Kagan analysis of first-quarter data, Verizon Communications Inc. claims 34% of the U.S. wireless market, while AT&T holds 32%, Sprint 14% and T-Mobile 17%. Thus, the index stands at nearly 2,635 — more than 100 points above the 2,500 highly concentrated mark. A combination of Sprint and T-Mobile would push the HHI further into the red, up to 3,117.
Once Comcast, Charter and other new entrants launch mobile offerings, however, they will be competing to take share away from the incumbent wireless operators, lowering the overall HHI score.
"Any judgement by the antitrust regulators would hinge on the definition of the market. Does the market only include the wireless operators today or will it include entrants such as the cable companies?" Bruner said, adding, "You can bet SoftBank and Deutsche Telekom will argue vehemently that the industry is beset with new entrants and governments have nothing to fear."
The rise in competition from new entrants into the wireless space also raises the possibility that Sprint could face competition in any bid for T-Mobile, Armbrust said.
"There is a chance that a cable entity would want to interrupt that [Sprint/T-Mobile] deal and/or get involved in it," she said, noting that during a period of convergence, "You really want to look for combinations where both parties bring something new to the table."
But even if cable operators or regulators do not try to block a tie up between Sprint and T-Mobile, there could be other hurdles to getting a deal done.
Armbrust sees Deutsche Telekom and T-Mobile as negotiating from a position of power. "T-Mobile is in good shape whether it merges or not. So that lopsidedness in the negotiations will effect something," she said.
Naaguesh Appadu, a professor at the M&A Research Centre under London's Cass Business School, believes the effect will be felt on the price tag Sprint may have to pay to get a deal done.
"Sprint or SoftBank will need a big chunk of money," Appadu said in an interview, noting that T-Mobile will require "a very good premium."
Beyond price, though, Appadu said that executive personality may be an issue.
"You have Son on one side and you have [T-Mobile CEO John] Legere on the other," Appadu said, noting that both executives have cultivated reputations for strong opinions that tend to shake up industries.