Sprint (NYSE: S) has told federal regulators that it may not survive if its $26.5 billion deal with T-Mobile (NASDAQ: TMUS) is not approved. That may not be enough to get the deal approved as regulators remain concerned about the loss of competition if the industry shrinks from four to three. T-Mobile and Sprint have argued that the deal would help them invest in 5G and launch that network faster than any of their rivals.
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This video was recorded on April 23, 2019.
Shannon Jones: Let's go ahead and dive right in into the merger madness that is Sprint and T-Mobile. These are the third and fourth largest carriers in the U.S. They've been attempting to merge a little over a year now, Dan. Regulators are raising some serious concerns, particularly on the end of consumers. Dan, there's a lot on the line right now. This was a $26 billion deal. Just how bleak are things looking for this deal and for Sprint, too?
Dan Kline: Everyone's speculating. We don't entirely know. Federal regulators have not come out and said, "Hey, we're not going to approve the deal." But a lot of the tone, a lot of the political rhetoric, has shifted to, "We're going to deny this deal." This goes back to why the two companies broke up their first attempt at a merger a few years ago. There's this inherent idea that having four wireless carriers is better than having three wireless carriers, but all three of them are really strong. There's a bit of a monkey wrench thrown in here, which is why we're talking about it -- Sprint came out this week and they said, "Hey, look, if this deal doesn't get approved, we might not survive." The company more or less... I don't want to say they restated their earnings, because that's more of an official process, but they came out and said that a lot of the postpaid additions -- the most-watched number -- weren't really paying customers. They were people getting an extra free line, they were people forced into a line they didn't really want or didn't really need. So they more or less admitted that some of their rosy numbers were smoke and mirrors, and that they may not have the ability to continue, or really the money to invest, should the merger not take place.
Jones: And it's not just about Sprint's future here. The other argument they've been pulling out of the hat is really trying to piggyback off of the White House and their administration, focusing on 5G, the race to 5G, specifically trying to compete with China, who is set to, I believe, launch 5G as soon as next month. Sprint has also been saying, "If you want 5G to become a reality for the vast majority of America, you need to allow this merger to go through." Let's dig into that, Dan, because that's kind of complex.
Kline: There's truth to that, and there's a John Legere piece of hype to that, as well. [laughs] You have the problem of, there are two other major wireless carriers. There's Verizon and there's AT&T. Both of them on some level are rolling out 5G. Legere, the CEO of T-Mobile, likes to point out that more or less, they'll have 5G in one neighborhood, then say, "Chicago now has 5G!" They very much overstate where they are. And, they don't have a lot of incentive to do it quickly, because T-Mobile on its own will get there, but they will not get there nearly as fast as if they merge with Sprint. Sprint probably won't get there at all, which is why they'll go out of business.
This is a huge investment. T-Mobile wants to lead the way and push for that, and they're willing to say, "Hey, approve this deal, and we'll get to 5G faster than anyone else." They may, they may not, but they will certainly push Verizon and AT&T -- in fact, they've already pushed Verizon and AT&T -- to move faster.
Jones: Dan, if I'm a consumer looking at this, and I'm thinking, "Reduced competition means more pressure on prices, I'm going to pay more," isn't the fact that with Sprint and T-Mobile, if this merger doesn't happen, Sprint now could very well go to the wayside. You're still losing a competitor either way, whether this merger happens or doesn't. If I'm a consumer, am I looking at this the right way, thinking, "I really am not going to win"?
Kline: What's hard to know is, Sprint is backed by SoftBank. SoftBank, the majority shareholder, has a lot of money. They could fund losses. They could underwrite Sprint for as long as they wanted to, more or less. The question is, are they going to get fed up and say, "Hey, look, none of the cable companies want to merge with us. There's no logical partner. The path to growth is just too expensive." They've survived, or put up acceptable numbers, by being the cheapest carrier. You can be the cheapest carrier, which T-Mobile has been at various points, if you're also a comparable network to everyone else. Right now, Sprint would argue that it is. It runs commercial saying, "Yeah, we don't have the best network, but hey, it's good enough." And it kind of is. But that's going to deteriorate over time.
T-Mobile and Sprint, if they stay separate companies, yes, they might keep prices down; but would you rather pay a few dollars more and have very reliable service and 5G -- 5G might let some people get rid of their internet connection. There's a real value to that. Again, it's hard to know. Sprint is running the red flag. "Oh, my God, we're going to go out of business!" That could just be a tactic. It's important to note that.
But it's very hard to argue that consumers won't be better off by a stronger T-Mobile. T-Mobile has been a very consumer-friendly company. They've helped eliminate contracts, overages. You now actually know what it costs to buy a phone. That may not seem like a good thing, but the old days of getting a free phone, but then your bill was $40 more a month, now it's broken down. You pay $40 more a month. T-Mobile has real pricing. If they say $50 a month, that's $50, including all the taxes and fees. They've done a lot of good, and I have a hard time believing that if they merge with Sprint, all of a sudden, they're going to turn evil and start going back to practices that -- their entire business proposition is being against a lot of the things you'd worry about.
Daniel B. Kline has no position in any of the stocks mentioned. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool recommends Softbank Group, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.