Reports indicate that merger talks between Sprint and T-Mobile have been restarted. A combination of the third-largest and the fourth-largest wires carriers in the United States would result in an entity boasting of over 127 million customers. This would pose a formidable competitive threat to the largest and the second-largest wireless carriers, Verizon and AT&T. According to sources the reason T-Mobile and Sprint restarted the talks was so as to share in the burden of network investments.
Last year in November talks between the two firms were ended as a result of valuation disagreements. At the time Tim Hoettges, the chief executive officer of T-Mobile’s parent company Deutsche Telekom indicated that the door was still open for more discussions.
Since then the shares of Sprint have been on a downward trend, losing over 20% of their value as questions were raised over how effectively the wireless carrier can compete when it is struggling with long-term debt amounting to over $32 billion. The majority owner of Sprint, Softbank Group, has been making efforts aimed at trimming the debt and this includes raising cash by listing a mobile phone unit in Japan.
Sources said that one of the key considerations being made in the discussions is the ability of Deutsche Telekom to consolidate the earnings of T-Mobile. The German telecommunications giant owns 63% of T-Mobile and the wireless carrier has become one of its prized assets. In order to retain a majority interest in the resulting entity Deutsche Telekom would probably be required to add to its investment.
Lack of scale
After failing to strike a deal last year in November the chief executive officer of SoftBank, Masayoshi Son, indicated that he would pursue other options. Despite the customer base of Sprint having expanded under the leadership of Marcelo Claure, this has mostly been due to discounting. According to analysts Sprint does not possess the scaled required to make network investments and compete effectively in a market that is saturated.
“… impossible for Sprint to sustain on its own, and the same problems still exists with SoftBank and Sprint not comfortable with a minority stake. But ultimately you have to believe that these two companies will end up together,” said Craig Moffett, an analyst at MoffettNathanson LLC.
Though it is in a distant third position T-Mobile has performed better compared to Sprint by scoring sustained gains in market share through innovative offerings, good customer service and improvements in network performance.