Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Don't let Masayoshi Son's confidence fool you: T-Mobile US Inc. is the one in the driver's seat, while Son and his Sprint Corp. are wishing and hoping for a merger.

Now that the quiet period around the recent U.S. government-led wireless spectrum auction has ended, Sprint and T-Mobile have started preliminary conversations about combining their businesses, according to a report Friday from Bloomberg News. While this lifted shares of Sprint, the potential merger has also been one of the most anticipated deals of 2017 -- not least because Son keeps hinting at it.

Meant To Be?
While T-Mobile's stock surge is justified by its renewed subscriber growth, Sprint shares have held up largely thanks to SoftBank's financial backing and ongoing merger speculation
Source: Bloomberg

Son is the billionaire behind Japan's SoftBank Group Corp., which became Sprint's parent company in 2013. He tried to merge Sprint with T-Mobile a year later, but regulators were too concerned it would result in higher prices for wireless customers. Son's made it no secret that he would try again under the Donald Trump administration and new Federal Communications Commission Chair Ajit Pai, who is considered to be more open to industry tie-ups than his Barack Obama-appointed predecessor, Tom Wheeler. Son's also already been working to gain favor with President Trump by promising to invest $50 billion in the U.S. technology space and create tens of thousands of jobs. 

It's not just the regulatory environment that has changed since their first merger go-round. Son may be driving headlines by talking his deal game, but T-Mobile is no longer the smaller, weaker player that he can just easily scoop up. It's the most attractive takeover candidate in the broader wireless/entertainment/media sector, which is in the early innings of morphing into an industry of powerful conglomerates. T-Mobile has leapfrogged Sprint to become the third-largest U.S. carrier, while Sprint burned through an astonishing amount of cash and continues to shed subscribers.

Can't Beat 'Em, Join 'Em
Sprint is looking to merge with its stronger rival T-Mobile, which has eclipsed it in number of subscribers and is sturdier financially:
Source: Bloomberg Intelligence

Led by outspoken, Twitter-loving CEO John Legere, T-Mobile has even stolen customers from its largest rivals, Verizon Communications Inc. and AT&T Inc., which are scurrying to diversify via megamergers and start building faster but costly 5G networks (so costly that Verizon agreed this week to pay a 437 percent premium for spectrum owner Straight Path Communications Inc.).

Meanwhile, Comcast Corp. and Charter Communications Inc., concerned that 5G poses a threat to their traditional broadband and cable packages, are teaming up to enter the wireless business. I wouldn't completely rule out their interest in T-Mobile, even if their new joint venture complicates things. I've also written that Dish Network Corp. and T-Mobile may be logical merger partners, as Charlie Ergen looks to make use of the spectrum he's been hoarding. and which his satellite-TV provider Dish doesn't need. Dish's Sling TV, an app for streaming live television, could also grow more quickly if it were re-branded as something more recognizable like T-Mobile. 

Merger Desperation
As Sprint burns through cash, it's resorted to putting up airwaves, phone inventory and other assets as collateral so it can borrow money to fund the business
Source: Bloomberg

So you see, Sprint needs T-Mobile more than T-Mobile needs Sprint, and just because regulators may be a smaller obstacle than in the past doesn't mean this is a slam dunk for Son. T-Mobile is growing faster than expected this year -- sacrificing some profit in the process -- and it just fulfilled its near-term spectrum needs by purchasing $8 billion worth of airwaves in the FCC's auction.

It's most assuredly going to get bought by somebody, and Sprint may be the most sensible partner. But Legere and T-Mobile's German parent Deutsche Telekom AG can afford to play hard to get and see what other offers are on the table before committing to Son. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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