x Abu Dhabi, UAESunday 21 January 2018

D-Day for SoftBank and Sprint

The founder of the Japanese telecoms conglomerate and the chief executive of its US-based contemporary are to decide soon on whether they will make a move for their rival T-Mobile US.

T-Mobile had the second-highest subscriber gains last year, adding 2.1 million in the three quarters since it completed its acquisition of MetroPCS Communications. Patrick Fallon / Bloomberg News
T-Mobile had the second-highest subscriber gains last year, adding 2.1 million in the three quarters since it completed its acquisition of MetroPCS Communications. Patrick Fallon / Bloomberg News

SoftBank’s billionaire founder Masayoshi Son and the Sprint chief executive Dan Hesse plan to decide in the next few weeks whether to move ahead on a bid for T-Mobile US after speaking with US regulators, people with knowledge of the matter says.

Mr Son will also meet with T-Mobile’s owner Deutsche Telekom to relay those conversations so the two companies can determine if they should begin structuring a deal, say the people, who do not wish to be identified. Deutsche Telekom asked Mr Son to gauge regulatory sentiment for such a deal, say two of the people.

SoftBank, which holds a controlling stake in Sprint, is attempting to convince the US government that merging the third and fourth-biggest wireless carriers will increase competition and improve prices and options against Verizon Wireless and AT&T. While the US Department of Justice (DOJ) and the Federal Communications Commission (FCC) have not completely dismissed the idea, they have resisted the concept of a Sprint and T-Mobile combination in preliminary talks with Mr Son, three people say.

“The argument that a third player in a market wants to merge with number four to compete is old and tired,” says Chris Sprigman, a New York University law professor and former justice department attorney, said in an interview.

“I’d be shocked if the professionals at the FCC and the DOJ are going to look at this the way Sprint wants them to.”

How Mr Son and Deutsche Telekom perceive the feedback from regulators will determine their next steps, three people say. While Mr Son is eager to press ahead with a deal, he and Deutsche Telekom will not proceed if they do not think they can win regulatory approval for it, two people say. Guidance from regulators could also determine what types of concessions, including possible divestitures, SoftBank and Deutsche Telekom will offer, one person says.

Spokesmen for Sprint, T-Mobile and the Bonn-based Deutsche Telekom declined to comment. Hiroe Kotera, a Tokyo-based spokeswoman for SoftBank, declined to comment. Representatives for the FCC and DOJ declined to comment.

Mr Son and Mr Hesse have spoken with other politicians and consumer advocates in Washington to discuss the idea, two people close to the matter say. Mr Hesse took part in an event last week with the US president Barack Obama to promote wireless internet use in US schools.

Their primary argument is that regulators have incorrectly viewed wireless as a market of four competitors when they should be seeing the industry as dominated by just two – AT&T and Verizon, two people say. The only way to break the dominance of the duopoly is to form a stronger third competitor, Sprint is arguing.

Of the 225.2 million monthly subscribers at the four top carriers in the United States, more than 75 per cent are customers of AT&T and Verizon, data compiled by Bloomberg show.

Sprint, based in Overland Park, Kansas, may have a difficult time convincing regulators after arguing the merits of keeping T-Mobile independent when AT&T attempted to acquire it in 2011. Then, Sprint argued competition would be hurt if the number of national carriers dropped from four to three.

“Removing T-Mobile from the market would substantially reduce the likelihood of market disruption by a maverick,” Sprint said in a 2011 filing asking the FCC to block AT&T’s proposed purchase of T-Mobile.

“T-Mobile, as one of only four national carriers, provides a critical constraint on AT&T’s consumer retail prices.”

Mr Son and Mr Hesse argue a combined entity will be a so-called super-maverick, a strong competitor that can help keep prices down, two people say. Regulators credit T-Mobile for pushing prices lower and taking customers from Verizon and AT&T. T- Mobile has “spearheaded” competition, says Bill Baer, the chief of the justice department’s anti-trust division.

Washington-based T-Mobile had the second-highest subscriber gains last year, adding 2.1 million in the three quarters since it completed its acquisition of MetroPCS Communications, compared with 4.1 million at Verizon and 1.8 million at AT&T.

Sprint, which is expected to report this week that its fourth-quarter net loss widened to US$1.3 billion, shed 2.1 million subscribers last year, according to the data.

“SoftBank’s argument about a super-maverick could make sense at some point in the future, but not now when T-Mobile is winning more market share than anyone else,” says Chris King, an analyst with Stifel Nicolaus & Co in Baltimore.

“Before, I saw the likelihood they could complete the deal as about 25 per cent, now I put it below 10 per cent,” he says, referring to Mr Baer’s comments.

Deutsche Telekom may use the initial resistance to press for a larger break-up fee to compensate the German company if the deal is blocked, one of the people says. Dish Network, a potential new wireless entrant, will not be part of any bid for T-Mobile, another person familiar with the matter says.

While the two sides have not worked out a deal or decided who will lead a merged company, a process which could take several months, they have had preliminary conversations, according to three of the people.

“Even if the negotiations with the authorities fail, Mr Son will consider another plan to enlarge Sprint,” says Naoki Fujiwara, the chief fund manager at Shinkin Asset Management in Tokyo.

“The acquisition of T-mobile is aimed at increasing customers in the US and Mr Son will take various measures to achieve the goal.”

The break-up fee has already emerged as a point of contention, say two people. SoftBank had indicated it wants that fee to be low, given the risks and heavy leverage already on Sprint, while Deutsche Telekom has indicated it would want a higher fee since the deal could be blocked and it would be challenging to attract customers and employees during the regulatory scrutiny, the people say.

Deutsche Telekom may want about 10 to 15 per cent of the deal size, or about $2.5bn to $3.8bn, say two of these people, noting T-Mobile’s market valuation of about $25bn.

AT&T agreed to pay a break-up fee of about $6bn in cash and assets when it tried to buy T-Mobile in 2011. The payment has helped T-Mobile challenge its would-be acquirer.

Deutsche Telekom chief executive Timotheus Hoettges was in charge then and would demand another high break-up fee given that experience, one person close to the company says.

“With T-Mobile, AT&T held a gun to their own head and the anti-trust division said, ‘Shoot yourself,’” says Mr Sprigman, who is the co-director of NYU’s Engelberg Center on Innovation Law & Policy.

“That was a really risky and very unsuccessful strategy. SoftBank can’t be that obtuse.”