July 16 (Bloomberg) -- A possible joint bid on wireless spectrum by Sprint Corp. and T-Mobile US Inc. would help the companies build their case for regulators to approve their potential merger.
The two rivals are working with separate teams and outside counsels to form a joint-bidding venture to participate in the Federal Communications Commission’s airwave auction next year, people familiar with the matter said this week, asking not to be named because the talks are private. The auction would give the companies access to low-band 600 megahertz frequencies, which would improve coverage because they extend to wide areas and are good at penetrating walls.
The bidding alliance is part of a push by Masayoshi Son, whose SoftBank Corp. controls Sprint, to sway skeptical regulators as it tries to take over T-Mobile. By pooling their resources in the auction, the companies would be able to pay more to the federal government to acquire wireless spectrum -- demonstrating that a full merger would help the companies make bigger investments in their networks, benefiting consumers.
“This seems to have less to do with a spectrum ownership strategy than it has to do with a negotiating strategy of two companies that want to merge,” said Craig Moffett, an analyst with MoffettNathanson LLC in New York.
While the companies have agreed on the broad outlines of a merger in which Sprint would buy T-Mobile for about $32 billion, the agreement isn’t likely to be announced until August, the people familiar with the matter have said. The companies, including T-Mobile shareholder Deutsche Telekom AG, expect the FCC and the Justice Department to take at least a year to evaluate the deal.
That means regulators could be preparing their rulings on a merger proposal just when the spectrum auction gets under way. Bidding for the airwaves is scheduled for sometime in the middle of next year. The joint bid by Sprint and T-Mobile could move forward on its own if a merger is scrapped, the people familiar with the matter said.
Sprint is asking banks for about $20 billion in funding for the T-Mobile merger, while SoftBank is seeking a similar amount, one of the people said. While most of those borrowings would pay for the takeover, some would go to operations and to the wireless auction.
The government’s offering of licenses for spectrum -- the invisible airwaves used to transmit mobile-phone signals -- would help Sprint and T-Mobile fill a need for more low-frequency capacity to compete more effectively in mobile broadband, particularly in rural areas and in cities, where it’s harder to provide coverage deep inside buildings.
Sprint shares rose 0.9 percent to $8.18 at 10:04 a.m. in New York and T-Mobile added less than 1 percent to $32.12.
Sprint has 10 percent and T-Mobile owns 4.5 percent of the available low-band spectrum, compared with 38 percent for AT&T Inc. and 34 percent for Verizon Communications Inc., according to Bloomberg Industries.
If they participated separately in the auction, Sprint and T-Mobile would have less money to outbid Verizon and AT&T for sizable chunks of the spectrum and would struggle to afford the necessary network upgrades to accommodate the added frequencies. Putting the airwaves into a joint venture would let the companies share those costs.
This echoes the argument both companies have made about the need to use mergers to get bigger to have a better chance against the two largest wireless carriers.
One company would control the joint venture, known internally as BidCo, which would be run by a separate management team, according to one of the people familiar with the plan. The companies have introduced the idea informally to the FCC, and one of the people familiar with the process said they haven’t seen any immediate opposition.
Still, the idea is likely to invite scrutiny. A joint bid for the spectrum on these terms would be unprecedented, said Iain Gillott, founder of researcher iGR Inc.
“We have had consortiums and JVs bidding together to buy spectrum. What we haven’t had is two of the top carriers in the country banding together to buy spectrum,” he said.
In its recent order outlining how much spectrum a carrier can hold to bid for the various airwaves in the 600 megahertz auction, the FCC said that any changes in the wireless marketplace, or consolidation, could lead to a revision of the auction rules.
The FCC also said it will consider further changes to auction rules in relation to joint bidding in the auction, and warned that “potential bidders will need to file well before the normal deadlines some of the information currently required in auction and license application forms.”
While Sprint and T-Mobile are trying to make long-range plans to have the best spectrum available for a time down the road when they ultimately combine, their current airwave holdings would exceed new limits if they were to merge.
The FCC recently adjusted caps limiting how much spectrum a carrier can own in a particular market or bid for in the upcoming auction. The new rules could require a combined Sprint-T-Mobile to divest a third of its 290 megahertz of combined spectrum in major markets, if the FCC permits a deal at all, Moffett said.
If the companies were allowed to merge on the condition they divest some of their excess spectrum, a sale of those airwaves could end up coinciding with the FCC’s auction. That could reduce the prices and participation the government agency is seeking, Moffett said.
“From a policy perspective, a merger would be a nightmare,” Moffett said.
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