SoftBank Corp. (9984)’s billionaire founder Masayoshi Son and Sprint Corp. (S) Chief Executive Officer Dan Hesse plan to decide in the next few weeks whether to move ahead on a bid for T-Mobile US Inc. (TMUS) after speaking with U.S. regulators, people with knowledge of the matter said.
Son will also meet with T-Mobile owner Deutsche Telekom AG (DTE) to relay those conversations so the two companies can determine if they should begin structuring a deal, said the people, who asked not to be identified because the talks are private. Deutsche Telekom asked Son to gauge regulatory sentiment for such a deal, said two of the people.
SoftBank, which holds a controlling stake in Sprint, is attempting to convince the U.S. government that merging the No. 3 and No. 4 wireless carriers will increase competition and improve prices and options against Verizon Wireless and AT&T (T) Inc. While the Department of Justice and the Federal Communications Commission haven’t completely dismissed the idea, they’ve resisted the concept of a Sprint and T-Mobile combination in preliminary talks with Son, three people said.
“The argument that a third player in a market wants to merge with No. 4 to compete is old and tired,” 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 Son and Deutsche Telekom perceive the feedback from regulators will determine their next steps, three people said. While Son is eager to press ahead with a deal, he and Deutsche Telekom won’t proceed if they don’t think they can win regulatory approval for it, two people said. Guidance from regulators could also determine what types of concessions, including possible divestitures, SoftBank and Deutsche Telekom will offer, one person said.
Spokesmen for Sprint, T-Mobile and 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.
Sprint fell 7.3 percent to $7.88 at the close in New York, its biggest one-day slide since the SoftBank takeover last year. T-Mobile declined 6.9 percent to $29.55, its biggest drop since May.
Son and Hesse have spoken with other politicians and consumer advocates in Washington to discuss the idea, two people said. Hesse took part in an event earlier this week with President Barack Obama to promote wireless Internet use in U.S. 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 said. 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 U.S., more than 75 percent 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 carries, provides a critical constraint on AT&T’s consumer retail prices.”
Son and Hesse argued a combined entity will be a so-called super-maverick, a strong competitor which can help keep prices down, two people said. Regulators credit T-Mobile for pushing prices lower and taking customers from Verizon and AT&T. T-Mobile has “spearheaded” competition, Bill Baer, chief of the Justice Department’s antitrust division, said last week.
Bellevue, 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 Inc., compared with 4.1 million at Verizon and 1.8 million at AT&T, according to data compiled by Bloomberg.
Sprint, which is expected to report next week that its fourth-quarter net loss widened to $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,” said Chris King, an analyst with Stifel Nicolaus & Co. in Baltimore. “Before this week I saw the likelihood they could complete the deal as about 25 percent, now I put it below 10 percent,” he said, referring to Baer’s comments.
Deutsche Telekom may use the initial resistance to press for a larger breakup fee to compensate the German company if the deal is blocked, one of the people said. Dish Network Corp. (DISH), a potential new wireless entrant, will not be part of any bid for T-Mobile, another person said.
While the two sides haven’t worked out a deal and haven’t 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, Son will consider another plan to enlarge Sprint,” said Naoki Fujiwara, Tokyo-based chief fund manager at Shinkin Asset Management Co., which oversees the equivalent of about $6 billion. “The acquisition of T-mobile is aimed at increasing customers in the U.S., and Son will take various measures to achieve the goal.”
The breakup fee has already emerged as a point of contention, said two of these 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 said.
Deutsche Telekom may want about 10 percent to 15 percent of the deal size, or about $2.5 billion to $3.8 billion, said two of these people, noting T-Mobile’s market valuation of about $25 billion.
AT&T agreed to pay a breakup fee of about $6 billion 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 CEO Timotheus Hoettges was in charge then and would demand another high breakup fee given that experience, one person said.
“With T-Mobile, AT&T held a gun to their own head and the antitrust division said, ‘Shoot yourself,’” said Sprigman, who is 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.”