Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

In the least surprising news of the day (or perhaps ever), T-Mobile US Inc. and Sprint Corp. are reportedly in "active" merger talks. Again. This could finally be the real deal. But some investors may be saying, hold up -- why does T-Mobile even want this thing? 

It's a fair question. Sprint isn't exactly a hot commodity, what with its $33 billion of net debt (same as its equity value) and cash-burning parties. Meanwhile, T-Mobile is on top of its game, proudly waving its magenta flag.  But there's a very simple answer: Sprint subscribers are low-hanging fruit for T-Mobile.

Don't Mind If I Do
T-Mobile stole Sprint's spot as the No. 3 U.S. wireless carrier. It makes sense to help itself to Sprint's subscribers next and solidify its standing:
Source: Bloomberg

The biggest obstacle for mergers in the wireless, pay-TV and media arena right now is all the stubborn billionaires either fighting to retain control or holding out for absurd offer prices, as my column on Monday explained. But while Sprint is controlled by Japanese telecom magnate Masayoshi Son, he's still very much a willing -- if not desperate -- seller, which puts T-Mobile (or anyone else) in a solid negotiating position. Son can't afford to wait.

But, see, neither can T-Mobile. All the easy subscriber wins for T-Mobile have been made by now. Impressive as its strategy to elbow Sprint out of the No. 3 industry spot was, from here it will be more challenging and costly to keep growing T-Mobile's base. Relative to that, an all-stock deal with Sprint to gain 40 million subscribers in one shot looks cheap. 

Time to Pounce
Sure, T-Mobile could wait for Sprint to get cheaper, but the longer it does the worse off Sprint's business and financials could get, which means more to have to fix later
Source: Bloomberg

It also knocks out a competitor that's resorted this summer to offering free -- yes, free -- service to certain customers who switch to Sprint. As sad as that promotion was, the industry felt the effects. Speaking at a conference last week, Mike Sievert, T-Mobile's chief operating officer, confirmed that it appeared as if Sprint "really killed it in July." Probably only July, but it shows the risk of occasional desperate promotions by Sprint.

A merger between T-Mobile and Sprint seems to be a foregone conclusion, even if they need a little more time to iron out what level of oversight Son will have at the new company, which will likely continue to be run by T-Mobile CEO John Legere and majority-owned by T-Mobile's German parent. 

What's more interesting is what happens to T-Mobile after that. Do Comcast Corp. and/or Charter Communications Inc. come a-knockin'? Could my dream of a T-Mobile/Sling TV mashup actually happen? Everything is moving so quickly around the industry, and Legere is not one to rest on his laurels. 

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

  1. While Sprint's cash from operations is positive, free cash flow has been negative in 13 of the last 16 quarters for a deficit of $338 million in the latest period.

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