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** Updated to include Chairman Pai’s press release **
The following nine articles serve as a good primer for the upcoming Attorneys General case against T-Mobile/ Sprint (we will add additional articles as they are suggested/ discovered):
- Original complaint filed by ten Attorneys General (nine states and DC) in mid-June. Note: most of the details of Dish’s involvement were not known at the time of publication
- An Economic Analysis of the T-Mobile/ Sprint Merger presented to the US House Subcommittee on Antitrust, Commercial and Administrative Law by Scott Wallsten. This is a true “balls and strikes” analysis
- Attorney General of Texas announcement that they were joining the T-Mobile/ Sprint merger complaint
- Bi-partisan letter from the Attorneys General of New Mexico (D) and Utah (R) to the US Senate Subcommittee on Antitrust explaining why they support the merger (hint: density matters). Their joint blog post on the topic reiterates the same points and is here
- New York Law Journal article reiterating the arguments that are made in the 9-state (+ DC) complaint
- The Electronic Frontier Foundation comments on the use of the Herfindahl Index concentration as the basis for rejecting the T-Mobile/ Sprint merger
- American Enterprise Institute analysis of the use of counterfactuals when considering the T-Mobile/ Sprint merger
- Former FCC Commissioner Robert McDowell: Blocking the T-Mobile/ Sprint merger is a “Fool’s Errand” (Bloomberg interview here).
- Oregon joins the lawsuit (but the NY Attorney General announces it) on August 12.
- The FCC Chairman’s announcement that he is circulating a draft Order to approve the merger.
UPDATED: Deeper – “Soon… Soon” and “Playing Charlie’s Hand” (Top 11 Documents Pertaining to the T-Mobile/ Sprint Merger and DOJ/Dish Agreement)
Updated to include a lengthy interview of Marcelo Claure by David Faber (new #10).
These 11 documents (in no particular priority order) will provide the best background on the T-Mobile/ Sprint merger and the corresponding Dish/ DOJ agreement. Note: this list will be updated to include the Sprint earnings release which is due on Friday, August 2.
As always, welcome your thoughts and feedback. The Deeper posts are web exclusives, but if you are interested in receiving TSB by mail, please send a request to firstname.lastname@example.org
- The original T-Mobile/ Sprint earnings announcement page. This has the original webcast, press release and presentation.
- The S-4 document filed with the SEC in July 2018 (shareholder approval document).
- The Dish 8-K released on Friday July 26 outlining the terms of their agreement with the DOJ.
- Dish also released their quarterly earnings on Monday July 29. The link to the 10-Q is here and SeekingAlpha transcript is here.
- Dish’s Q&A with Mike Dano of Light Reading that was posted on the evening of Friday, July 26.
- The T-Mobile earnings call (moved to Friday) video as well as SeekingAlpha transcript.
- The redacted transcript of the 13-state lawsuit against the merger.
- FCC Chairman statement on the T-Mobile/ Sprint transaction (May 20) is here.
- Full transcript of the joint town hall meeting held on the Sprint campus in October 2018 (article from Fierce Wireless).
- Great 13-minute July 26 CNBC interview of Marcelo Claure (Sprint Exec Chairman) is here.
- Great website from Spectrum Omega where you can see spectrum band by geography by carrier.
Greetings from Davidson, North Carolina, home of the Jay Hurt Hub for Innovation and Entrepreneurship (known locally as “The Hub”). They had their 1st Birthday party last Thursday and 230 turned out (including yours truly). The Hub serves not only as a world-class incubation center, but also as a “door” between Davidson College and the surrounding community. It was great getting to meet several dozen entrepreneurs who are making it happen, including my good friends at Lucid Drone Technologies.
This was an extremely busy week with second quarter earnings, a landmark antitrust lawsuit, and DOJ approval for the Sprint/ T-Mobile merger. We also gave two major presentations this week: 1) Basics of IoT (given to Charlotte-area CIOs), and 2) Ten Telecom Trends Worth Watching (given to several dozen institutional investors). While we are going to cover each of these topics in future TSBs after earnings season has ended, we would be glad to quickly cover/ discuss/ debate these with your teams. Please let us know if there is interest and we will schedule.
Second Quarter Earnings Summaries (excl. T-Mobile)
AT&T: Continued high dependence on Communications division stability to provide cash for remaining divisions (and ~50% of Net Revenues and ~60% of Communications EBITDA is coming from Mobility); FirstNet deployment ahead of schedule; Prepaid mobility net adds strong (completely offset by reseller losses); Postpaid upgrade rate lowest ever at 3.3% of base (helped Mobility EBITDA); DirecTV and DirecTV Now subscriber metrics down a combined 940K+ (Dish announces financial and operating results Monday); Fiber net adds of 318K and they now penetrate ~25% of current deployed footprint (fiber gains offset by non-Fiber U-Verse losses of the same amount and 34K DSL losses); Business revenues growing (sequentially including wireless up 2.9% and y-o-y up 2.3%), but margins still soft with legacy voice/data product losses outstripping gains; Debt is being serviced (gross debt down ~$6 billion, net debt down $9 billion since beginning of year) and a buyback contemplated beginning in 2020.
Comcast: Good times for Cable segment with strong revenue growth (up 3.9% year-over-year – lower than current dollar GDP growth of 4.6%) and margin expansion (up 7.4%); High Speed Internet additions up 209K in quarter, with video down 224K and phone down 65K; Cable wireless MVNO growth of 181K customers (nearly all should be considered postpaid phone as eSIM for watches not added until end of 2Q) but $88 million EBITDA loss (equal to $20/ mo. per customer driven primarily by phone subsidies and advertising expenses); Cable Capex down to 11% of revenues but expected to rise in second half to 12-13% overall; NBC Universal flat; Sky reported revenues down driven by currency fluctuations (up year-over-year on constant currency basis).
Charter: Similar to Comcast (as Craig Moffett correctly points out, “Comcast would look better if its portfolio looked more like Charter’s. Charter would be better if its execution looked more like Comcast’s”); Overall growth of 258K High Speed Internet (includes business) subs in quarter, with losses of 182K voice and 151K video; High Speed Internet now has 51% penetration of total homes passed (this includes New York City – Verizon, and Los Angeles, Dallas, Ohio and North/South Carolina – AT&T); 208K MVNO subscriber growth but larger EBITDA loss than Comcast ($119 million or about $95/ sub/ mo.); Appears to be faster migration from residential phone to mobile than is seen at Comcast; Video programming costs only up 0.9% in the quarter; Commercial services growth up 4.7% (Comcast up 9.8%); Residential Capex down $850 million vs 2Q 2018; 99% of all cable plant DOCSIS 3.1 ready.
Overall, all three stocks are doing well this year and the story for each is one of post-merger integration performance. On this front, as the chart nearby shows, Charter continues to outpace their nearest rivals when it comes to short-term value creation.
As this column spends a lot of time looking at challenger business models, it is definitely worth mentioning an excellent article in LightReading this week related to cable MVNO data usage (the assumptions are “in the ballpark” according to a well known consultant to the cable industry). We will discuss more in an upcoming TSB but worth pointing out the link for those of you who are following cable MVNO success.
Bottom Line: Cable continuing to win disproportionate share of broadband decisions (likely above 100% – have to wait for CTL, VZ, WIN, Altice earnings releases) which continues to be worrisome; Charter/Spectrum needs a commercial services kick in the pants to get to a peer growth rate (and their recent reorganization which changes to reporting to the CFO will hurt, not help); AT&T reduces debt by riding a relatively stable wireless pricing environment to higher cash flows and preserves their dividend in the process; capital needs are stable to growing for wireless and plummeting for cable. T-Mobile, which deserves its own earnings segment, grows revenues and free cash flow amazingly well in 2Q – more on that next week.
A Brief Comment About the DOJ Antitrust Lawsuit Against Facebook, Apple, Amazon, and Google
Software development is, by nature, soft – there’s no hard asset. As such, the creation of new software is one of the lowest barriers to entry in our modern business economy. Lots of people creating lots of software and making it as useful as possible to as many as possible is progress (and, as this column has argued over many years, there’s a lot of bad code out there that needs to be improved). Continuous process improvement creates user loyalty. Lots of loyalty on the Internet creates an ever-larger communications/social network/base. These large networks tend to be hard to break unless a) other software companies create more useful products/ user experiences (think Facebook vs. MySpace, or Snapchat vs. Vine, or Facebook vs. Google+), or b) they violate user trust (perhaps by selling or using information for nefarious purposes or not asking for user permission when it’s the right thing to do), resulting in less engagement.
Should the government exercise greater scrutiny over acquisitions? Perhaps, if it appears that the effect of the acquisition will be to thwart competition (many saw Facebook’s acquisition of Instagram and WhatsApp as exactly that). There’s a stronger case to be made that these acquisitions were made by Facebook to create an ad network to rival Google (and it got a lot bigger – see here), and that’s a good thing, right?
This does not excuse short-sighted and wrong-headed actions on the part of large participants. Protecting freedom of speech is critical to the functioning of our society (and what separates us from regimes like China and Russia and Iran). On a very small scale, I think Apple’s decision to not allow incoming phone numbers to be interrogated so we improve the communications experience (and better identify robocallers, scammers, and their ilk) is misguided, but that’s Apple’s call (pun intended) – Google, Samsung and companies like Hiya have made a mint providing really good call blocking/ identification solutions. Apple is assuming carriers (and not WhatsApp/ Google Voice/ others) will control the person-to-person voice calling market for the indefinite future – I happen to disagree (as do many others – see below).
As this investigation pertains to communications, I am hoping that the DOJ of Justice and Federal Trade Commission (FTC) will find that the Federal Communications Commission (FCC) could do more via regulation (or at least persuasion) to drive a better consumer experience. Universal carrier smartphones (now championed by Apple/ Google and Samsung, but resisted by carriers with cumbersome network certification processes), stored voicemail portability, over the top call/text identification, carrier equipment interoperability, and eSIM (which new T-Mobile and Dish have both agreed to and which would create significant competition) would all create a better experience for minimal cost. Why did Assistant Attorney General Makan Delrahim choose to insist on eSIM as a part of the merger and not Chairman Ajit Pai? It’s a question that should be asked.
I have not gone over the deep end (I started out my career in Sprint’s Local Telecom Division creating ARMIS reports and have resisted the heavy hand of regulatory bureaucracy over the past 25 years). But if more competition can be created with better interfaces and information, and the inertia of size prevents a more open and competitive environment, then the FCC should intervene.
Playing Charlie’s Hand
After leaving ACN at the end of June, I immersed myself in the T-Mobile/ Dish/ DOJ process (from this recent WSJ article, it sounds like Charlie Ergen, Dish’s CEO, was not engaged in the broader discussion until late May). DOJ approval came on Friday, thanks to a lot of last minute negotiations (Dish’s SEC filing outlining their obligations is here).
This is a very good deal for Dish, and T-Mobile gets $40 billion in debt but also gets enough 2.5 GHz spectrum to provide a lot of wireless broadband to America. We’ll play John Legere’s (and Mike Sievert’s) hand in next week’s TSB but here’s what Charlie has:
Ace: Extension of the deadline to install a broadband network
King: 800 MHz network that’s already supporting tens of millions of customers
Queen (?): MVNO rates that enable competition and scale out of the gate (could be an Ace or King)
Queen: Industry-wide eSIM in five years (access to customers and their devices)
Jack: Access to 20,000 towers that are eliminated in the new T-Mobile merger
Jack*: Nine million Boost/ Virgin/ Sprint prepaid subs (who all need Sling/ Hopper) for $1.4 billion (or about $150 per customer)
Medium card: Access to capital to pay for the network
Medium card: Ability to pay a fee and not take the 800 MHz spectrum
Low card: Ability to earn revenues for leasing some 600 MHz spectrum to T-Mobile (although in his interview with LightReading, Charlie mentions it as having more value)
*How Dish is marketed to existing Boost customers is a topic that will get some discussion this week in the media. Unfortunately, marketing Boost to rural current Dish customers is not feasible today but will be if new T-Mobile keeps their commitments.
It’s presumptuous to provide any advice to a brilliant card shark like Charlie, but here’s what might make his good deal even sweeter:
- Run all voice through an OTT provider like Google Voice (they have a lot of good insights into Sprint network from their previous integration). That will reduce/ eliminate your minute-based MVNO charges.
- Consider WalMart or Best Buy as an alternative to traditional 3PL/ logistics service providers. API integration is easy, and picking up at Best Buy or WalMart is very convenient. They also happen to have very good trade-in programs.
- Consider an affiliation (Nextel Partners-like) structure to accelerate your buildout. Hopefully you have not given that resale capability away in the MVNO agreement. Interesting note: The Sprint affiliate focus resulted in 30%+ market share (at peak) in at least two of the larger market areas. Local management matters a lot.
- Don’t neglect the business/ enterprise opportunity. No one expects you to announce a strategic partnership with Hewlett Packard Enterprise or Amazon Web Services or EdgeconneX or Vapor IO (edge) or Qwilt (next gen CDN) but a 3G and 4G-less network could be very attractive to businesses.
Next week’s issue will balance remaining earnings news with a discussion of T-Mobile’s hand. If you would like a copy of either the Top 10 Trends or the IoT Basic presentation, please let us know at the email below and we’ll get you a copy.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and will include them on the list.
Have a terrific week!
Greetings from Lake Norman, North Carolina, home to one of four Osprey Cams on the Catawba River (and near our home). More information on this initiative is here from the North Carolina Wildlife Federation.
We have had an overwhelming response to the TSB re-launch over the past three weeks with many new readers, contact information updates, and ideas for future columns. As of July 21, we are current with requests to be added to the newsletter. Please keep them coming!
As of Sunday, there was no Deutsche Telekom/ Dish Network/ Department of Justice merger deal, and it appears from recent reporting (CNBC – David Faber) that each party was going to work through the week and likely not extend the deadline past July 29.
While it appears that there is one final issue remaining (Dish change of control and capitalization restrictions following the completion of the Boost/ spectrum deal), it’s important to note that previously negotiated items could come into play as well. Here’s likely what’s on the table:
- Dish change of control and capitalization provisions (namely preventing deep-pocketed technology or cable companies from using especially low Boost MVNO pricing to compete against the new T-Mobile). These would need to apply both to cable companies and multi-national conglomerates like Liberty Global.
- Dish’s ability to use the T-Mobile network beyond a prescribed level (which was rumored to be 12.5% of capacity). This appears to have been resolved through a tapering mechanism which incents Dish to build a competitive network over the next 3-4 years.
- An extension (or some sort of relief) from the FCC which would allow Dish to keep its AWS-3 spectrum provided they have completed their previously communicated milestones (see those here in the latest Q1 report – page 57). A difference could arise between whether Dish has completed an “Initial design” – see link in previous sentence – or has completed a fully-functioning, scalable network that is widely available for IoT applications. Dish is too savvy to not have brought this into the deal terms.
- The overall economics and term of the MVNO deal. While the exact terms are unknown, it’s likely that they are the opposite of what is typically seen in the wholesale market as larger volumes on the new T-Mobile network need to spur more incentive to create a fourth wireless infrastructure.
- Transition details (e.g., how aggressively the new T-Mobile can use promotions, dealer relationships, and other means to attract Boost customers). My guess is that Dish and T-Mobile covered these early on in the discussions (re: T-Mobile is building a distribution presence in less populated areas as they roll out 600 MHz spectrum and that’s also where Dish’s focus is placed. There’s only so much ex-urban and rural addressable market to claim, and Straight Talk (Wal-Mart) is already there with Verizon’s and AT&T’s networks).
There are likely a few more critical items that have been negotiated, but these five sections likely comprise the major part of any deal to be struck between the government, Dish, and Deutsche Telekom. Move one lever, and another likely will change. Too much activity, and the deal is likely off the table.
With that as a backdrop, let’s look at the alternatives that Deutsche Telekom, the Department of Justice (along with the FCC), and everyone else are considering.
Deutsche Telecom’s Decision-Making Framework:
Objective: Enable T-Mobile USA to have the scale, cash flow and access to capital necessary to effectively compete against Verizon and AT&T.
It’s important to note that Deutsche Telekom’s (DTEGY) market cap is about $79 billion and T-Mobile USA’s (TMUS) market cap is about $66 billion. Assuming the ownership chart from the merger announcement is correct, around 52% of the German parent company’s value is derived from TMUS. And, with the parent company value stagnant for the past five years (see chart here), the US subsidiary has been the primary source of increased equity value (around $40 billion in market cap increase in the last five years, of which $25 billion would be attributable to the DTEGY market value).
Here are the two most likely alternatives to a Sprint merger:
- Double down on current growth initiatives. As we will discuss in next week’s TSB, meaningful growth prospects for the wireless market are dismal. However, T-Mobile has a lot of 600 MHZ low-band spectrum expansion (and capacity augmentation) left to do. They also have disproportionately low presence in the business market, which could change with focus on Private LTE (using in-building deployments of AWS-1 spectrum). With some Sprint disruption from a cancelled merger, there’s probably some short-term metro growth opportunities. These actions in together do not create a sustainable competitive advantage, but could form the basis of a 2-4 year plan to generate more cash flow and allow DTEGY to reduce their holdings as needed. And a more attractive T-Mobile USA could be interesting to potential suitors over the next five years.
- Choose a different merger partner. There are few out there, but Dish might be interesting. A Dish acquisition would fill the TV/content gap and allow T-Mobile to compete more effectively against cable. Assuming Dish’s Phase 1 build is acceptable to the FCC (see point #3 in the previous section), the buildout costs associated with Phase 2 would be considerably lower. And, if this merger were to happen after Sprint recapitalizes (see below), the argument could be one of network rationalization to four players (#3 purchasing #5). If T-Mobile USA needs lower content/ programming costs to be competitive against Verizon and AT&T in the future (which means they want to be a video provider and not merely an enabler), this might be their best option.
Either of these options presents fewer challenges than integrating Sprint into their current operations. The network migration from Sprint to T-Mobile is much more complex than turning up more 600 MHz capacity in second and third-tier markets and partnering with in-building providers to enable mid-band spectrum for current and future customers.
Bottom line question: Which is the greater competitive threat, a recapitalized Sprint that could be eventually acquired by a cable or technology company, or Dish + Boost + AWS-3 Spectrum which receives tens of billions of dollars in additional capital from cable, technology and private equity companies? The answer to this question likely determines what happens this week.
The Department of Justice/ Federal Communications Commission Framework:
Objective: Enable long-term competition (defined as four or more robust wireless service providers) by providing as many options for consumers and businesses in as many places as possible.
The general consensus is that the government did the right thing when they blocked the acquisition of T-Mobile by AT&T in 2011 (chronology here and November 2011 Wall Street Journal article here – subscription required). T-Mobile at that time was on the ropes and headed for the trash heap. Sprint wasn’t much stronger as they were still saddled by debt from the Nextel merger (specifically the affiliate acquisitions – see last week’s column) and from network upgrades (called Project Vision). 4G (LTE) investments could only be made outside of the most densely populated areas by a few parties (a weak justification for the merger).
While it seems like we are at a similar set of circumstances as 2011, it’s important to consider the following alternatives to approving the Sprint merger (specifically, holding fast to their requirement that anyone can invest any amount in Dish at any time to create a strong fourth wireless option):
1. Auction more (low and mid-band) spectrum faster. The FCC has both low and mid-band spectrum that they can bring to the table quickly. They can create rules that allow a large portion to be accumulated by competitive parties, and they can fast track and otherwise encourage Apple, Samsung, and IoT manufacturers to quickly bring modules and devices to market that can use this spectrum within quarters, not years. The Wall Street Journal has a good spectrum primer here and more on spectrum actions that the FCC is taking as a result of their FAST plan is here.
2. Foster and drive the growth of disruptive technologies and processes such as eSIM while regulating phone universality and equipment purchase agreements. Technically, it’s a combination of dual SIM (more than one choice) + electronic SIM (easy to switch) that is probably required. This would make it easier to switch from one network (e.g., Verizon’s macro network on the highway) to another (e.g., a secure private LTE network in the office building). Moving these two changes along would make it easy for prospective customers to try out a T-Mobile MVNO like Ultra Mobile for a week while still keeping the incumbent network as a backup.
Apple and Google Pixel devices are already carrier neutral, but the FCC could do a lot more to make the device certification process easier for low end Android devices, and making those devices capable of carrying the full feature set (e.g., Voice over Wi-Fi for some Verizon or Sprint MVNO customers on certain devices). Best Buy is leading the way with universal device promotion (which makes perfect sense for a retailer – less Stock Keeping Units or SKUs), but there’s a long way to go with low-end Android devices.
Finally, there are Equipment Installment Purchase (EIP) and leasing plans. EIP is an 18/24/30-month contract by another name, substituting the legacy post-paid carrier subsidy (which was covered through higher monthly service charges) with monthly equipment installment purchase fees, which may or may not have anything to do with the underlying cost of the smartphone. The dual + eSIM solution may alleviate some of the EIP pain, but equipment installment plan portability and device universality would do a lot more to stimulate competition than a Dish/ Boost/ AWS-3 solution.
3. Go “nuclear” and adopt the European model for MVNOs. David Faber, in the CNBC link above, outlines the clear competitive impact this has had on Europe. The nuclear option would be to mandate new network connection points between wireless carriers and the MVNO community. This option warrants an entirely separate TSB, but for some reading on how this would work, this white paper is very useful.
Bottom line: Antitrust lawsuits are but one of many tools governmental agencies have to complete their objectives. If four is the magic number of networks needed to facilitate a competitive environment, then they need to be more active. Congress should be a part of this solution as well.
What is Everyone Else Thinking?
Here’s a brief synopsis of what a few of the other important players are thinking:
- Dish: Value of spectrum is preserved no matter the result. See Gregory Williams’ (Cowen & Company) summary here. Mr Ergen always wins the game he decides to play (unless things go south with the FCC).
- Sprint: No good outcomes outside of a) complete Softbank takeover, or b) Chapter 11 restructuring (likely). Both options could lead to reestablishment of their affiliate program (see last week’s Q&A quote with Michel Combs – he all but said that if the merger is rejected Sprint will focus on cities in exchange for a nationwide roaming deal or reaffiliation). The best option for a fourth competitor is a recapitalized Sprint with $15 billion in debt and strong affiliate partners (funded by Google, Dish, or others). That would worry Verizon and AT&T.
- Cable: Most of my cable friends are probably cheering on the eSIM/ dual SIM solution described above. A 7-day trial with no switching and an eSIM would be a cable marketing dream. Other than that, they are heads down on bringing their current operations to profitability. Acquiring Sprint would be a big headache with a lot of transition and little synergies. Comcast was good to quickly deny rumors that they were interested in acquiring Boost or any spectrum (tmonews article here).
- Google/ Apple/ Microsoft/ Facebook/ Amazon: We will write about them next week, but with software being the critical component in 5G adoption (see the July 7 TSB), they are not bystanders or mere audience members. Microsoft would be one to watch very carefully given their recent (non-exclusive) announcement with AT&T.
Hopefully this is all resolved soon. Until then, it’s decisions, decisions…
Next week, we will publish our annual strategic planning primer. It’s a must read for anyone who is trying to make sense of the telecommunications industry.
Greetings from Charlotte, North Carolina, where summer is in full swing (the opening picture is yet another from our trip to Willard over the Independence Day holiday – Abby and Gus in “full throttle”). This week we will discuss the never-ending engagement that is the T-Mobile/ Sprint merger.
A quick note before we dive into this week’s topic: We are posting a Deeper section on the Website with links to key articles. I found this living, breathing bibliography to be very useful with clients and welcome your feedback (articles we should have included, format, etc.).
A Chronicle of the T-Mobile/ Sprint Courtship
For those of you who have been hiding under a rock, here’s the timeline of the T-Mobile/ Sprint courtship from the past five years (we’ll have more timeline for readers in the Deeper version of this article on the website):
June, 2014: Rumors circulate that Sprint will acquire T-Mobile for $32 billion. The two companies would carry a combined $54 billion in long-term debt (NYT Dealbook article here).
August, 2014: Sprint ends their pursuit of merging with T-Mobile after significant regulatory pushback (NYT Dealbook article here).
November, 16: Donald J. Trump elected President.
December, 2016: Masa Son visits President-elect Trump and commits to a $50 billion investment in the U.S. that would create 50,000 jobs.
February, 2017: Rumors begin to surface that Sprint and T-Mobile will merge and that Sprint is willing to cede control (Reuters article here).
November, 2017: Sprint and T-Mobile announce that they had ended merger talks (NYT Dealbook article here and joint press release here). Talks break down this time over who would control the new company’s Board of Directors (WSJ inside story here).
Three Times a Merger (???)
April, 2018: T-Mobile and Sprint agree to merge in an all-stock deal valuing Sprint at $26.5 billion. The combined company would have $55 billion in enterprise value and $60 billion in debt. T-Mobile parent Deutsche Telekom (DT) would own 42% of the new company but control 69% of the voting rights and appoint 9 of the 14 Board seats (WSJ article here; formal announcement here; investor presentation here). John Legere to serve as CEO and Mike Sievert to serve as COO of the new entity.
May, 2018: Marcelo Claure becomes Executive Chairman of Sprint. Current CFO Michel Combs (formerly of Altice) succeeds Claure as CEO.
September 2018, January 2019, and March 2019: Federal Communications Commission (FCC) stops the merger clock three times to obtain and analyze information related to the merger. As of this writing, the 180-day merger approval clock is on Day 222 (FCC timeline here).
December, 2018: Committee on Foreign Investment in the United States (CFIUS) approves the merger.
May, 2019: The Federal Communications Commission’s (FCC) Chairman throws his support behind the merger under the conditions that rural broadband coverage is increased, 5G rollout commitments are met, prices are frozen for the next three years while the buildout is underway, and that Boost is divested (see FCC statement here). The formal vote is expected in the next few weeks.
May 30, 2019: Reuters reports that Amazon is interested in buying Boost Mobile and any wireless spectrum that would need to be divested. Amazon neither confirms nor denies the report. Craig Moffett pens one of the best blog posts on the topic called “Sprint and T-Mobile: Welcome to Crazy Town” in which he dismantles the arguments that a) Amazon would want to buy, and b) that Deutsche Telekom would want to sell to Amazon.
May 31, 2019: Comcast issues a statement saying that they are not interested in buying the Boost Mobile business or wireless assets after David Faber (of Comcast-owned CNBC) reported that they might be interested.
June 11, 2019: Thirteen states and the District of Columbia sue to block the merger. A start date for the trial is set for October 7. Two additional states (Texas and Indiana) report to the FCC in June that they are investigating the merger but do not join the lawsuit. (Articles here and here). T-Mobile, in their response to the court, claims that these states are “Living in the past” (full document from Scribd here).
June 18, 2019: Bloomberg reports that Charlie Ergen, CEO of Dish, is close to striking a $6 billion deal with T-Mobile to purchase Boost and some wireless assets.
July 12, 2019: T-Mobile and Sprint delay the merger deadline past July 29. Deal terms imposed by T-Mobile and Deutsche Telekom surrounding maximum network usage percentage of the new Sprint/T-Mobile network for the interim period and third-party ownership of the new Dish are reported to be the holdups (WSJ article here). Note: per the merger agreement, the drop-dead date is October 29, 2019 – see page 33 of the Letter to Shareholders).
Are you exhausted yet? Hopefully not, because this ballgame is going to go a few more innings. The bottom line from this timeline is that Sprint/Softbank went from an acquiring position to an acquired position in a short amount of time. Because of their large debt load (driven in part by ~$13 billion in Sprint and Nextel affiliate acquisition debt incurred a decade earlier), Sprint’s competitive options are limited. Meanwhile, Verizon and AT&T continue to tap the capital markets for network buildouts and spectrum purchases to build their lead.
Is Sprint as Attractive Now as they were in April 2018?
One of the issues with long engagements is that things can change. The beauty of the merged entity vision, the promise of network and distribution synergies, the allure of attractive competitive positioning can dull after 18 months. The questions DT shareholders might be asking are “Is Sprint still worth 0.10256 T-Mobile shares?” and “Can we achieve more value by just buying Dish or pursuing another structure with Sprint?”
Nearby is a snapshot of Sprint’s postpaid phone, prepaid phone, and net debt situation. Here’s what’s going on:
- Sprint is moving prepaid customers into the postpaid base. As a result, prepaid attractiveness is likely understated as are postpaid promotional pricing pressures. In the four quarters ending March 31, 2019, Sprint migrated 388,000 net subscribers from prepaid to postpaid. Sprint’s activity in this area has increased over the past year, largely driven by increases in credit quality of their prepaid base (note: T-Mobile migrated 555,000 subscribers as well during the four quarters ending 3/31/2019 but their level of activity appears to be flat to down).
- Net debt is flat and net debt to adjusted EBITDA ratios have improved over the past year(s). This is largely driven in part by an increase in leased devices. Sprint’s leverage ratio is in the 3.9 – 4.0x range with the phone rental depreciation included in EBITDA (a more comparable metric for their peers, including T-Mobile). It’s worth noting that T-Mobile has pulled back on device leases and is moving back to traditional Equipment Installment Payment plans (with initial payments for super-premium models). More on this trend on page 12 of the Investor Factbook here.
- Subscribers are down slightly but phone churn is rising (there’re about 100 basis points difference between T-Mobile’s branded postpaid phone churn and Sprint’s). It’s unclear how the prepaid migration is included in the postpaid churn calculation, but if the 388,000 customers are treated as postpaid gross additions, it’s likely that the migrations are muting the promotional pricing pressures described earlier.
- Sprint is bleeding cash to build out their network. Over the last four quarters, their free cash flow (see page 11 in the link here for annual information and page 18 in the link here for quarterly information) has decreased by nearly $2 billion and the network build is consuming cash (a lot of this build is presumably in advance of merger completion). The good news, as shown by the recent RootMetrics and OpenSignal reports is that Sprint’s efforts are working. In many markets where they were good they have gotten better, and in many markets where they were really bad they are now a lot closer to their peers.
- Sprint has received surprisingly positive accolades for their 5G network performance relative to their larger competitors. These reviews are very early in the network upgrade process, but Tom’s Guide, CNET, TheVerge.com all come to the same conclusion: Sprint’s approach results in faster speeds than 4G across a wider coverage area, while others have substantially faster speeds than 4G across a smaller area.
Is Sprint as attractive as they were in April 2018? The short answer is yes, but they were quite homely a year ago. How Sprint can persevere while spending money on needed network upgrades given the $9.3 billion in redemptions coming due over the next two years remains to be seen (see chart from Sprint’s Investor Relations website nearby). It’s likely to be a painful financial restructuring should the merger end up being scuttled or significantly delayed.
I’ll close this week’s discussion with the last Q&A on Sprint’s May 7 Earnings Conference call:
Question (from Jeffrey Kvaal from Nomura Securities):
There is the possibility that at some point over the next weeks or months that we wake up in the morning and the likelihood of a T-Mobile merger comes down quite a bit. Given these concerns and comments that you have just expressed to us, what should we be then making of the prospects for the company looking out a few years from that?
Answer (from Michel Combs, Sprint’s CEO):
… We remain optimistic that the government will see a compelling argument in support of our merger…If the merger doesn’t go through, we expect to continue to make improvements to the business, including our Nexgen Network deployment… We will have to reposition the company, reposition the company in how we play and which battlefield will be ours. While Sprint has made a lot of progress improving network and financials, as I have just mentioned, we still lack, let’s say, we still have offsetting challenges that I’ve mentioned, which means that we will have to reduce, of course, our promotional activity in the market, we’ll have to narrow our geographic focus. So at the end of the day, that means that we will be less of a nationwide competitor to AT&T and Verizon. So that’s site based, and we’ll have to reposition the company that way.
Next week, if the merger has not been approved, we will attempt to answer the question “Should T-Mobile buy Dish instead?”
Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and will include them on the list. We have been overwhelmed by requests this week (over 200 added since last Sunday) and greatly appreciate your continued interest and advocacy.
Have a terrific week!
As we mentioned in TSB, this section will feature 5-10 articles on Microsoft or the LECs:
- 2018 CNBC full interview with Satya Nadella
- PG Mag review of Microsoft Office 365 (referenced in the article)
- Microsoft 2017 Financial Analyst Presentation (this was the last analyst day)
- Bill Gates on Startups, Investing and Solving the World’s Hardest Problem (YouTube)
- Microsoft HoloLens 2 Announcement at Mobile World Congress (abridged – YouTube)
- Fiscal Year 3Q 2019 Webcast (most recent)
- 2019 BBC article on the future of Microsoft
- Just Because – Dancing CEOs (Gates and Ballmer – YouTube)
The Local Exchange Carriers:
- Windstream: Motion to prevent Winsdstream from paying Uniti anything (Fierce Telecom)
- Windstream: Arkansas Democrat Gazette article on Windstream bankruptcy (Feb 2019)
- Frontier: Dallas Morning News 2017 article chronicles Verizon transition to Frontier (#FrontierFail)
- CenturyLink: 1Q 2019 earnings webcast (registration required)
- Just because – Glen Post III, former CEO of CenturyLInk 2017 speech. Hard to believe he was their CEO for fifteen years.