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Potential deal could face regulatory hurdles, might stall T-Mobile's momentum if it is actualized

This one is bound to generate some controversy if it's true -- The Wall Street Journal's Ryan Knutson, Eyk Henning, and Thomas Gryta are reporting that Japanese mobile carrier Softbank Corp. (TYO:9984) -- majority owner of Sprint Corp. (S) -- is planning to try to turn around its unprofitable subsidiary by making a bid for T-Mobile USA (which is traded as T-Mobile US Inc. (TMUS)).

I. T-Mobile USA -- is it For Sale?

The report claims:

Sprint Corp. is working toward a possible bid for rival T-Mobile US Inc., people familiar with the matter said, setting the stage for a giant telecom merger that if permitted by regulators would leave the U.S. wireless market dominated by three big companies.

Sprint is studying regulatory concerns and could launch a bid in the first half of next year, the people said. A deal could be worth more than $20 billion, depending on the size of any stake in T-Mobile that Sprint tries to buy.

T-Mobile wide
[Image Source: Flickr (top); Getty Images (bottom)]

Further there's some thought that the potential seller might be willing; The WSJ report states:

Deutsche Telekom ... is looking to possibly exit the U.S. market, the people said.

That may be puzzling for some.  It would be easy to understand why Deutsche Telekom would want to sell T-Mobile USA.  But its recent purchase of MetroPCS and merger of the revitalizing fresh fresh blood into T-Mobile USA appeared to represent a more patient approach, particularly after Deutsche Telekom agreed not to sell shares in the newly formed merged entry for 18 months.

Or did it?

In April Thomson Reuters I/B/E/S reported that "sources familiar with Deutsche Telekom's thinking" claimed the move wasn't a long term commitment, but rather a savvy bid to make the fallen assets selleable.  One of these sources stated:

MetroPCS is not a game changer for T-Mobile, although it should have it to make it more attractive.  Deutsche Telekom is willing to give up control of T-Mobile. T-Mobile is in play.

And Deutsche Telekom Chief Financial Officer (CFO) Timotheus Hoettges' revealed something interesting to reporters in May 2013, stating:

There is an exception clause in the contract regarding the lock-up.  We are in a position to sell all shares in one go.

And in November T-Mobile sold 9 percent of the outstanding shares in the merged company (66.15 million, reducing its stake in the merged company from 74 percent to 67 percent.  The deal revealed another convoluted disclaimer to the share sale prohibition; as the sale's $1.96B USD in prospective generated cash would be used to purchase spectrum for the merged carrier it wasn't technically considered a "sale" by Deutsche Telekom.

Deutsche Telekom
A German Federal court has forced Deutsche Telekom to pay to police its users.
[Image Source: MobiFrance]

Thomson Reuters I/B/E/S writes of the deal:

Deutsche Telekom, which owns 74 percent of T-Mobile, said on Twitter that its stake would be cut to 67 percent after the sale, but that it was not selling its shares.

Huh, alright -- so you're selling shares, but you aren't selling them?  Needless to say this odd (non-)sale was seized upon as further evidence that Deutsche Telekom's end goal was to offload T-Mobile USA, although it would need a buyer to do that.  Now -- if the WSJ report is to be believed -- it may have found just such a propsective buyer.

II. What Does This Mean?

Verizon Communications Inc. (VZ) solely-owned subsidiary Verizon Wireless is currently the largest carrier in the U.S.; AT&T, Inc. (T) is the second largest U.S. carrier. Together they control two-thirds of the U.S. market, formed from dozens of mergers of the "Baby Bells", small carriers that were formed in the wake of the U.S. Department of Justice's (DOJ) 1982 breakup of the American Telephone and Telegraph monopoly.

The "uncarrier" T-Mobile USA -- whom German carrier Deutsche Telekom AG (ETR:DTE) owns 67 percent of the outstanding shares of -- is the fourth largest carrier in the U.S.; while Sprint -- 80 percent owned by Softbank following a $21.6B USD acquisition -- is in third.  Together the pair control the remaining third of the U.S. cellular subscription market for major carriers.

From a simplistic viewpoint a Softbank purchase of T-Mobile USA and merger with Sprint would leave America with just three large carriers, at a time when more Americans than ever before are using this market for more purposes than ever before.

U.S. Carriers

The pecking order would remain more or less unchanged, with Verizon on top, followed by AT&T, and then Sprint/T-Mobile in terms of postpaid (contract) subscribers.  Wholesale (MVNO) numbers would play out in a similar fashion.

MVNO by carrier

But an underlooked aspect is that the merged entity would be that the newly formed entity would be effectively a monopoly in the non-resale prepaid market, where it would have a 2/3rds market share, owing to the combined MetroPCS (T-Mobile), Boost (Sprint), and Virgin Mobile (also, Sprint) prepaid brands.

Prepaid market share

This is one key roadblock to a deal -- antitrust regulators could require the pair to sell or spin off at least one of their prepaid brands, prior to approval of the merger.  And considering how vital these brands are to the companies' revenue, that could be a dealbreaker.

Indeed, the report suggests that T-Mobile and Sprint (and their foreign owners) are wary of government intervention to stop the potential reduction of options in the already.  This likely stems not only from the decrease in the number of major carriers, but also the dramatic decrease in choice in the prepaid market.  The picture becomes slightly less drastic if you lump MVNO and prepaid together, but it's still one of the deal's most troubling problems.


Source: WSJ

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RE: Oh please no!!!
By w8sk on 12/15/2013 11:55:01 PM , Rating: 3
I would like to shed some light on Sprint as a very recent ex-sprint customer.
Our family previously were Verizon customers 2+ years back but the amount of money we were wasting was not worth it.
The decision was switching to Sprint. Given the much lower costs and having unlimited internet/text/msging plan it made sense to go here.
Now I did my research then to find more about the quality/service of Sprint. They were great and they provided cheaper prices and much better plans. I also found out that during that time (2 years ago) they were making a big, slow, and costly transition from Wimax to a new LTE network. This was at a time when Verizon/AT&T were already ahead of the competition. It was pretty obvious we were joining at a time of transition. However even knowing that we made the move to Sprint and got everyone Samsung Galaxy S2 phones that were sprint modified w/ Wimax compatible chips inside.

Of course the 1st half of the contract the service was pretty good and the 4G speeds were adequate (considering the limits of Wimax frequencies/bandwidth, however eventually the service got worse and call signals weren't great and getting even 3g/4g connection was spotty at best towards the 2nd year. This was expected and I warned that this would happen before we signed on.

You see Sprint is in a tough spot right now. They are trying to phase out Wimax phones/network while still trying to support it for the already current customers. But at the same time they are expanding their new LTE network while also having their new phones compatible w/ that new network instead of Wimax. Problem is the new network isn't even ready, coverage sucks and is limited and they are still transitioning. So this is a catch 22. They cant provide good service to current Wimax customers w/ Wimax phones and at the same time it also applies for their new LTE phones on a gimped LTE network.

This is some serious growing pains Sprint is having to deal with and its also affecting their service and customers.
My point is, even as a ex-Sprint user and current T-mobile customer I completely understand why Sprints service was becoming crap. I would gladly be a repeat customer once this phase of transition is complete, that is if they maintain competitive prices to their competitors.

Anyways, what I'm saying is the merging isn't bad just because it involves Sprint. (if you consider what they've going through behind the scenes). No that is not the problem. The problem is how can this possibly go smoothly. Sprint's new network expansion is still ongoing and their woes w/ current Wimax customers service don't help. MetroPCS probably has their own unique network/frequencies and in all this chaos including another problem of incorporating a whole other enormous network of T-mobile is sure to be a clusterfuck that would take a decade to sort out.

RE: Oh please no!!!
By Reclaimer77 on 12/16/2013 7:16:50 PM , Rating: 2
You see Sprint is in a tough spot right now.

They put themselves there though. WiMax sucks. LTE was clearly the better way to go, which is why everyone BUT Sprint moved in that direction.

They sold me "unlimited" data that I could hardly ever use the service was so bad. To hell with Sprint, I hope T-Mobile tells them to sod off.

You called going with Verizon a "waste of money". At least with Verizon I can actually USE my goddamn data. Even 3g with Verizon is faster with less latency than 4g with Sprint. To me it's worth the money to get vastly superior service.

RE: Oh please no!!!
By w8sk on 12/17/2013 12:02:12 AM , Rating: 3
I'm not emotionally invested in any brand or company. That is stupid. I merely see competitor #1/2/3, etc. Can't a person explain something without being labeled on side A or B? This is just an explanation as to WHY Sprints quality is in the gutter right now. For those who want to see logic behind the cause other than thinking its bad magic joojoo. Wimax was a horrible bet, but you can see they are trying to fix it.

Verizon IS expensive and (in my opinion) a waste of money, especially for those with large family plans (my situation). The T-mobile service I have right now is on par w/ what I had before Sprint spiraled down (which was good in my area before Wimax support dwindled in support of Sprints new LTE).
$110 a month for 5 lines. Each line a 500mb 4g cap(+$10 per line for increment increase of 2.5/5/unlimited) w/ unlimited call/text/3g & No contract is a whole lot more sensible in price/service than paying $250+ on Verizon WITH a 2 year contract. Maybe you "need" fast speeds, but on these puny smartphones anywhere from 5-10mbps is fine for me. Anyways, Sprint allowed me to close my contract early, no hassle because they understood that the service was horrible w/ our Wimax phones. I'll probably switch again a few years later when the scene changes once more.

RE: Oh please no!!!
By Reclaimer77 on 12/17/2013 9:17:05 AM , Rating: 2
Can't a person explain something without being labeled on side A or B?

Of course. I didn't think I was labeling you anything, apologies if that's how I came off.

I just cannot put into words how frustrating being with Sprint for a two year contract was. How poor the level of service. How abundant the dropped calls and periods of poor to no data connection.

And if I had known T-Mobile would make a miraculous turnaround and eliminate contracts, I would have went with them instead of Verizon. But alas, at the time they were the best option.

Maybe you "need" fast speeds, but on these puny smartphones anywhere from 5-10mbps is fine for me.

No it's not like I'm downloading tons of files to my phone all the time. It's not so much the speeds that made Sprint unusable, it's the horrible latency of the WiMax network. But don't take my word for it:

This is just an explanation as to WHY Sprints quality is in the gutter right now.

Personally I feel I was the victim of a bait and switch. They purposefully and knowingly built up an inferior network, but lured people in with "unlimited" data plans. I know WHY Sprints service quality is in the gutter, I'm just not going to excuse them for it.

This is what happens when people vote with their wallets. Sprint is getting what they deserve.

RE: Oh please no!!!
By Myrandex on 12/17/2013 10:02:22 AM , Rating: 2
Using 3G with Verizon is a royal pain. I believe I hit faster speeds using dial up internet at times years ago. My work iPhone4S would hit .1mbps on areas of full coverage, which is pathetic and should not qualify for 3G coverage. While at the same time my personal AT&T Windows Phone 7 device (LG Quantum) would regularly break 1mbps with less signal strength being reported. Not to mention being able to use simultaneous voice and data...

RE: Oh please no!!!
By Reclaimer77 on 12/17/2013 10:18:28 AM , Rating: 3
My work iPhone4S

Ah I think I've found your problem :)

RE: Oh please no!!!
By euclidean on 12/18/2013 5:58:49 PM , Rating: 2
Definitely have to agree with you. Also, some of the lag in service comes with the frequencies Sprint (the service) was allowed to operate on. It wasn't but a few months ago that Nextel was still up and running (iDEN network) and that they had purchased the rest of or a big block of (can't remember) spectrum from Clearwire.

They're LTE service before these 2 things occurred was limited to a small area of Spectrum in Sprint's control. Now with both of those, they're rolling it out all over.

I am still on Sprint, I gave them another 2 years in August to see how things go before I switch (I get a 25% discount on my Sprint it's much cheaper than the already cheaper price compared to Verizon & AT&T). I've got 4G LTE in areas I'm surprised about already, including many areas where they haven't announced coverage yet...and speeds are really decent averaging 10mbps down. In some instances I've hit as much as 27mbps, but as low as 1.2mbps, for non-launched markets, that's not too bad.

This talk definitely has me interested...

"Can anyone tell me what MobileMe is supposed to do?... So why the f*** doesn't it do that?" -- Steve Jobs

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