Sprint, T-Mobile Said Near Price, Termination Fee Accord

Sprint Corp. is nearing an agreement on the price, capital structure and termination fee for an acquisition of T-Mobile US Inc. that could value the wireless carrier at almost $40 a share, people with knowledge of the matter said.

Sprint will offer about 50 percent stock and 50 percent cash for T-Mobile, leaving Bonn-based parent Deutsche Telekom AG with about a 15 percent stake in the combined company, according to the people, who asked not to be identified because the process is private. The agreement could be announced as soon as July, the people said. At just under $40 a share, T-Mobile’s equity would be valued at about $31 billion.

A deal would bring together the third- and fourth-largest U.S. wireless carriers to create a more formidable competitor to leaders AT&T Inc. and Verizon Communications Inc. Billionaire Masayoshi Son, the founder of Tokyo-based SoftBank Corp., which owns 80 percent of Sprint, has been pitching the deal to skeptical regulators as beneficial to consumers in both wireless and Internet service.

“In order to compete against the big two, AT&T and Verizon, scale is essential,” said Satoru Kikuchi, an analyst at SMBC Nikko Securities Inc. in Tokyo. “The mobile-phone industry is an industry that needs business investment, so the larger the better.”

Deutsche Telekom, which owns about 67 percent of T-Mobile, was seeking at least $40 a share, two of the people said. SoftBank is willing to pay in the upper $30s, and the two sides have bridged the gap, the people said. The companies haven’t set an announcement date, and there’s still a lot of work to be done before a deal can be completed, including deciding management of the new entity, the people said.

Bulking Up

T-Mobile fell 2.3 percent to $33.49 at the close in New York amid concerns about the transaction getting approved by U.S. regulators. Sprint dropped 4 percent, while Deutsche Telekom added 0.6 percent in Frankfurt and SoftBank rose 0.3 percent in Tokyo.

A deal would only have a 30 percent to 40 percent chance of winning regulatory approval, said Alexandre Iatrides, an analyst at Oddo & Cie. in Paris.

“Even if we take into account the operational recovery that T-Mobile’s new management implemented, this is a good price for Deutsche Telekom,” Iatrides said. “In the long run they don’t have the size to compete as a standalone company. The amount of capex they’d need to maintain the same quality as AT&T and Verizon would be way too high.”

Industry Consolidation

Softbank’s Son declined to comment at an unrelated press conference in Japan today. Bill White, a spokesman for Sprint, declined to comment, as did Andreas Fuchs, a spokesman for Deutsche Telekom. Anne Marshall, a spokeswoman for T-Mobile, didn’t respond to a message seeking comment.

Son is seeking to bulk up Sprint as consolidation increases across the communications industry. Verizon closed a deal earlier this year to buy out Vodafone Group Plc’s stake in their wireless venture for $130 billion. Comcast Corp. and Time Warner Cable Inc. have announced a merger, and AT&T plans to acquire satellite-TV operator DirecTV for $48.5 billion.

One of the hangups remains agreeing to leadership for the new company, the people said. A month ago, a person familiar told Bloomberg News that T-Mobile Chief Executive Officer John Legere, 56, was the leading candidate. A few days later, Sprint CEO Dan Hesse said in an interview on Bloomberg Television that it wouldn’t bother him not to run the combined company.

“I am 60 years old,” he said. “I have a lot of things I still want to do in life.”

Enterprise Value

Additional work that remains to be done includes developing a model that forecasts Sprint and T-Mobile’s futures independently and together, two of the people said. The projections are key to convincing regulators that allowing a merger is in consumers’ best interests. AT&T’s deal for DirecTV has given Son more confidence that he can make a strong case, two of the people said.

A price of $40 a share equates to an enterprise value of about $47.4 billion, which is 7.4 times UBS AG’s estimate for 2014 earnings before interest, taxes, depreciation and amortization, analyst John Hodulik wrote in a research note today. Sprint currently trades at 9 times estimated 2014 Ebitda, data compiled by Bloomberg show.

The sides are nearing an agreement on a reverse termination fee, two of the people said. Son wants to pay about $1 billion, while Deutsche Telekom has pushed for closer to $3 billion, people familiar with the matter said earlier.

Failed Deal

The value of the transaction could reach the level of Deutsche Telekom’s failed attempt in 2011 to sell T-Mobile to AT&T when bond holdings and debt disposals as well as the breakup fee from that earlier deal are considered, said Stefan Borscheid, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart.

The breakup fee could be key for Deutsche Telekom investors, according to Ulrich Rathe, an analyst at Jefferies Group LLC, because it promises some tangible value for the German company. Rathe wrote in a research note today that the deal is unlikely to pass regulatory scrutiny.

Bloomberg News previously reported a deal would probably be announced in June or July. It’s possible a deal announcement could slip into August, one of the people said. If no deal is reached by then, the sides are likely to stop negotiations for several years and wait for a new U.S. presidential administration, the person said.

(Updates with closing share prices in sixth paragraph.)
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