Rap Patrol

Tidal Distracts From Sprint's 99 Problems

It needs to focus on a T-Mobile merger instead.
At Closing, April 25th
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At Closing, April 25th
63.93 USD

There are big dumb deals, and there are small dumb deals. Sprint Corp. doesn't discriminate.

Its big one was an oldie -- the 2005 merger with Nextel Communications, whose network it later wound down after customers jumped ship and shareholders revolted. Thank goodness that's long over with. 

Now Sprint has struck another puzzling -- albeit tiny -- deal for Tidal, the music-streaming service spearheaded by rapper Jay Z. The fourth-largest U.S. wireless provider (yes, Sprint has fewer subscribers than even T-Mobile now) agreed on Monday to buy 33 percent of Tidal for an undisclosed price. According to the website Music Business Worldwide, Sprint paid $200 million for the stake, which would value Tidal at about $600 million. 

Gimme a Beat

Jay Z's Tidal is still a small player and losing money, so why is Sprint valuing the business at $600 million?

Source: MIDiA Research

Sprint CEO Marcelo Claure, who is joining Tidal's board, said the partnership will offer Sprint customers "access to exclusive content and entertainment experiences in a way no other service can." Uh, he might have forgotten that AT&T Inc. is in the process of buying Time Warner Inc., one of the biggest entertainment-media companies in the world and parent of TV's creme de la creme, HBO, but I digress.

Tidal, whose premium subscription plan costs $9.99 a month, has some big hip-hop artists involved: Jay Z, his wife Beyonce, Kanye West, Rihanna, etc. But its market share is still miniscule. 1 As of March 2016, the service said it had amassed 3 million paid subscribers. (It didn't give an updated figure in Monday's statement.) MIDiA Research, however, pegs Tidal's active subscribers for the end of the year at 1 million. For comparison, Spotify Ltd., which is angling to go public this year, has topped 40 million paying customers, while Apple Inc.'s Apple Music is in the 20 million ballpark and Pandora Media Inc. said this month that its service surpassed 4.3 million paid subscription customers.

Like Sprint's problems, Tidal's boil down to intense competition. The service had a net loss of $28 million in 2015, wider than the year before even as revenue increased. 2 Considering its financials and still relatively small user base, Sprint's deal may be tiny but certainly not cheap.

Sprint, too, is a money-loser. Its net loss was $1.8 billion for the 12 months ended in September. And while it's controlled by Japanese billionaire Masayoshi Son's SoftBank Group Corp., Sprint doesn't have the money to be gambling on potentially fruitless deals -- especially when T-Mobile US Inc. is about to come up for grabs. Does it really need any distractions now?

Sprint Snapshot

With a pile of debt, this wireless provider doesn't need any distractions

Source: Bloomberg

Profit figures are for the last 12 months.

T-Mobile, valued at $50 billion (versus Sprint's $36 billion), is one of this year's top takeover candidates. As soon as the Federal Communications Commission's spectrum auction wraps up, bidders will likely emerge. Son has made it no secret that he wants to combine Sprint and T-Mobile.

But deeper-pocketed companies are waiting in the wings, too. Comcast Corp., valued at $176 billion, is dipping its toe into the wireless business and could look to buy T-Mobile. Billionaire and media mogul John Malone, whose favorite hobby is stoking deal speculation, said recently that Trump's presidency could herald a new era of consolidation in which companies such as Comcast and Charter Communications Inc. team up to buy T-Mobile. 

Sprint probably needs T-Mobile more than anyone, yet its finances are a bit strapped (Son's fortune aside). Sprint owed almost $37 billion as of the latest quarter, more than quadruple its trailing 12-month Ebitda. To be sure, a deal for T-Mobile would probably be structured as a merger of equals using stock.

On the Upswing

While Sprint's finances still need work, the service has at least stopped losing subscribers. Anticipation of a looser regulatory environment and a possible merger with T-Mobile has also boosted the stock:

Source: Bloomberg

Sprint has come off as a bit desperate in trying to raise money to help fund its business. Its latest weak signal came in October when it announced the sale of a portion of its 2.5-gigahertz and 1.9-gigahertz spectrum.

The shares surged more than 3 percent Monday morning after the Tidal stake purchase was announced. But was it really worth the $200 million? I'm doubtful, but we'll see. A best-case scenario may be that one of the Tidal takeover rumors (which have involved Apple, among others) comes to fruition and results in a bigger premium than what Sprint paid for its stake.

Either way, now's probably not the time for Sprint to be squandering cash. It's got bigger fish to fry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Although the exclusive release of Beyonce's much-hyped "Lemonade" album last April probably was a big help.

  2. This is according to a filing from the Swedish holding company that Jay Z and his consortium bought in 2015 to launch Tidal.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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