Sprint (S) is backing off its plan to acquire wireless competitor T-Mobile US (TMUS), but the deal’s demise should prove to be a win for consumers.
T-Mobile has already shaken up the market, cutting prices and slashing fees with its self-proclaimed “Uncarrier” strategy. Now, analysts say, Sprint will also have to improve its offerings and cut prices to succeed on its own.
The proposed $32 billion deal was the brainchild of Japanese billionaire and Softbank CEO Masayoshi Son, who bought Sprint last year to expand into the United States. Son argued that the combination would create a more formidable competitor to market leaders AT&T (T) and Verizon Wireless (VZ).
But regulators, who blocked an AT&T deal to acquire T-Mobile in 2011, disagreed. “Four national wireless providers is good for American consumers,” Tom Wheeler, chairman of the Federal Communications Commission, said in a statement on Wednesday. “Sprint now has an opportunity to focus their efforts on robust competition.”
Although a combined Sprint-T-Mobile would have about double the customers and spectrum airwave licenses, its incentive to compete would be greatly lessened as well, regulators concluded. The U.S. had only three national carriers and little price competition before Deutsche Telekom bulked up T-Mobile through acquisitions starting in 2008.
Since the demise of the AT&T deal, T-Mobile has become just the kind of brash competitor regulators love. Fast-talking, shoot-from-the-hip CEO John Legere cut prices for monthly minutes, family data plans and international roaming, prompting the larger carriers to cut their rates in many cases as well.
Son was promising that a combined Sprint-T-Mobile would also become a new competitor in the market for high-speed Internet connections at home, but regulators didn’t see that as a realistic possibility. They’re still waiting for the big telecom carriers to fulfill promises they made a decade ago when that segment of the market consolidated.
Competition concerns won’t be an issue if French telecom upstart Illiad acquires T-Mobile, however. Illiad founder Xavier Niel last week proposed paying $15 billion for a little more than half of T-Mobile, but T-Mobile has so far resisted the overtures.
A boon for consumers
The Sprint-T-Mobile deal could also have led to major hiccups and service disruptions as the two companies combined their operations, just the kind of annoyances that drove millions of customers away from Sprint after it acquired Nextel in 2004. Regulators would have wanted lengthy negotiations before approval, leaving the companies in limbo in the meantime. And the two operate largely incompatible wireless networks.
Sprint’s network is built on the CDMA and LTE protocols, while T-Mobile uses GSM and LTE. And there is almost no overlap between the airwave frequencies that the two carriers use, either. That means customers from one of the two companies would probably have to replace their phones just to stay connected.
The apparent tough stand by regulators against Sprint’s plan, at least behind closed doors, had some consumer advocates hoping that other mega-mergers such as Comcast’s (CMCSA) plan to buy Time Warner Cable (TWC) and AT&T’s move for DirecTV (DTV) might also be scrutinized.
“Comcast, AT&T, and Sprint were all out there trying to sell the counterintuitive notion that having fewer competitors would somehow lead to more competition,” says Matt Wood, policy director at nonprofit advocacy group Free Press. After knocking down the T-Mobile bid, regulators "should see likewise just how empty that promise is in the deals that remain on the table."
On Wall Street, where many analysts saw the proposed merger as a potential boost to industry profitability, there was less excitement over the deal’s demise. Shares of T-Mobile sank 7% to $31.58 midday. Sprint shares plummeted 18% to $5.95.
Investors may fear that Sprint’s cash flow will be hurt as it seeks to cut prices and compete more, says Walter Piecyk, an analyst at BTIG. But the stock should stabilize around $6 as it turns around and gains more customers. "Let’s see what story Sprint will now be able to tell," Piecyk wrote in a report.
Son replaced Sprint CEO Dan Hesse with Bolivian billionaire Marcelo Claure, a Sprint board member and founder of mobile distributor Brightstar. Claure may be able to shake up Sprint's operations -- and attitude -- more quickly than Hesse and more in line with Son's desires, analysts say.
“Sprint will have no choice but to spend money – lots of it – to bring its sub-par network up to snuff,” telecom analyst Craig Moffett wrote in an analysis of the now-dead merger. “They will also have to cut their service prices, which are simply too high relative to competitors’.”
Not so good news for Sprint shareholders, but very good news for wireless consumers.