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.

The merger of wireless companies Sprint Corp. and T-Mobile US Inc. -- perhaps the most anticipated mega-deal of 2017 and one that's been years in the making -- is finally just a couple of weeks from a formal announcement. But to some investors who are in the business of speculating on M&A transactions, this one isn't worth touching. 

Hold The Applause
Sprint has lost $5 billion of market value this year as it nears a merger with T-Mobile that will face an uphill battle in trying to secure regulatory approval
Source: Bloomberg

Sprint is the only company I can think of whose stock would remain lifeless despite an open secret that it's on the verge of turning its toughest rival into its staunchest ally. The lack of usual merger excitement is due to an otherwise weak business and the high risk that this deal is dead on arrival.

Antitrust authorities tend to oppose industries consolidating from four major competitors down to three. And I also can understand investors not wanting to bank on which way the winds of the Trump administration might blow. But these two wireless carriers can also make a decent case that competition is hurt more if they don't merge. 

Vulnerable
Sprint and T-Mobile need one another to go up against Verizon and AT&T, both of which have shown interest in expanding into media entertainment to make their subscriber base stickier
Source: Bloomberg

T-Mobile, as the distant No. 3 to Verizon Communications Inc. and AT&T Inc., has probably grown almost as much as it can on its own. That's not to say its journey to this point wasn't impressive, but it simply may be maxing out for what it is: a smaller, low-cost, pure-play wireless provider.

As for Sprint, while it has returned to profit after three years of losing money and ceding share to T-Mobile, the business still doesn't look healthy. It's had to resort to desperate offers and that makes me wonder how long-lasting this recovery will be. If my concern is warranted, then regulators would be leaving Sprint to get weaker while AT&T and Verizon become more powerful.

Consider how things could play out should the Sprint-T-Mobile merger get blocked: T-Mobile would probably hook up with another player, such as Comcast Corp. -- a deal much tougher for regulators to block, even if that combination is more detrimental to consumers in the end. Meanwhile, we know Sprint has already tried to find alternative merger partners unsuccessfully.

Sprint's chairman and billionaire backer Masayoshi Son always intended to buy both Sprint and T-Mobile and was surprised when the government rejected the idea a few years ago, leaving him with a half-completed goal. He's talked of a 300-year plan for his technology empire, and with his financial support and visionary mindset, coupled with T-Mobile CEO John Legere's proven turnaround skills, Sprint and T-Mobile have a much more solid future together. Apart, they're fighting a small fight against each other while the conglomerates spread out to TV-and-movie entertainment and cable-and-streaming services. 

Regulators will worry that the merger will put an end to the industry price wars that have benefited consumers, a legitimate concern. Still, it feels like they have the option to either let T-Mobile and Sprint team up now, with contingencies, or watch the vultures swoop in for them later when they're more challenged.

Weak Signal
Sprint has a large debt burden and is burning through cash
Source: Bloomberg

It would be reminiscent of Staples Inc. and Office Depot Inc., a merger the government thwarted last year for similar reasons, even as Amazon.com Inc. becomes a bigger threat to the two office-supplies retailers. Will either one be around in a decade? I can only shrug. After their deal collapsed, Staples got acquired by a private equity firm anyway, and we know leveraged buyouts haven't saved other retailers (in fact, it's hastened the downward spiral for many of them).  

It's a fool's errand to guess how President Donald Trump's recently confirmed antitrust chief, Makan Delrahim, and his staff will view Sprint-T-Mobile. But Son has been lobbying the president since last year while promoting his $93 billion Vision Fund with the promise to create thousands of U.S. jobs. Sprint and T-Mobile will make the infrastructure jobs argument for their 5G network build-out plan, too. And Trump is known to be more easily swayed by convincing talk than getting in the weeds of details and data.

The odds of a deal happening may not look good to most merger arbitrageurs, but from a regulatory standpoint, there's more to consider for the wireless industry and consumers than just the fact that it will further concentrate the big players at the top. Hopefully, the Trump administration will take that into account. 

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

  1. AT&T is awaiting the government's nod to complete its $109 billion acquisition of TV-network owner Time Warner Inc., a transaction widely expected to get approved even though it's arguably more of a threat than Sprint-T-Mobile when viewing the broader space holistically. Verizon has clearly considered some equally big mergers (which its CEO has recently downplayed) that would also have a good shot at clearing antitrust hurdles because none of the hypothetical merger partners are Verizon's direct competitors. But again, that doesn't mean they wouldn't be bad for consumers.

  2. Regulators' good intentions haven't panned out in other industries as well. Shortly after Hertz Global Holdings Inc. was ordered to spin off Advantage Rent A Car as a stipulation of its Dollar Thrifty acquisition, Advantage filed for bankruptcy. A small grocery chain also collapsed after buying some stores that Albertsons Cos. divested to facilitate its sale to Safeway Inc.

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