Telecom's Conundrum Throws Wall Street Off Its Game

  • Willing dealmakers face complex calculation on high-risk moves
  • Telecom firms in ‘prisoner’s dilemma’ with potential mergers

The colliding worlds of mobile and cable are giving their Wall Street advisers a high-stakes lesson in what’s known in game theory as the prisoner’s dilemma.

At the center of the U.S. telecommunications industry’s predicament is Sprint Corp., the money-losing and fourth-largest U.S. wireless carrier. Sprint has publicly expressed its desire to consolidate -- either as a buyer or a seller. But like prisoners deciding whether to confess while not knowing whether others will do so, the dilemma for players in this multi-dimensional M&A game is whether to make the first move or none at all -- all the while second-guessing what each rival might do.

“There are a finite number of parties out there, and there’s even a smaller number of potential combinations,” said John Harrison, head of global media and entertainment at EY. “The fear among both the companies and their advisers is missing out or being strategically isolated.”

Masayoshi Son’s SoftBank Group Corp., Sprint’s largest shareholder, has several paths that may dictate the game. He could sell Sprint to T-Mobile US Inc., the third-largest U.S. wireless carrier, controlled by Deutsche Telekom AG. Or, Son could merge it with a cable operator, such as Charter Communications Inc., with cash and SoftBank stock. SoftBank has as much as $65 billion in debt financing lined up for an offer if it decides to move forward, people familiar with the matter said on Aug. 1.

A move toward Charter could draw in Altice NV’s U.S. unit, which is now studying a bid for its cable peer. Verizon Communications Inc. explored buying Charter in January and could return to the asset if it feared losing it to a rival, like Sprint. Still, Comcast Corp. and Charter signed a pact this year giving Comcast a say over any deal involving a wireless company. That would apply to Verizon and Sprint but may not apply to SoftBank.

Taking Sides

Wall Street banks typically must choose one company to advise and possibly finance on a potential deal. While some of the relationships are decades-long, others change depending on the deal. The motive is simple: bankers want to back the companies with the best shot at finishing a transaction because they earn the bulk of their fees on completed -- not attempted -- deals.

Telecom has had its share of megadeals driven by market-share consolidation and even some that stretched across industry sectors, with the latest example being the $85.4 billion AT&T Inc. takeover of Time Warner Inc. that is now awaiting regulatory approval. What’s different now is the potential domino effect of a wireless-cable combination, which hasn’t been done in the U.S. That makes Charter a prized asset, and its shares are up about 38 percent this year.

“The question is, ‘Do you need to own both cable and wireless infrastructure for 5G?’” Harrison said. “Both sides are trying to figure out if a bundled wireless and fixed broadband offering makes their customer base more sticky, or if it actually would lead to a significant discounting in price that devalues the whole market.”

Charter has no need to sell, which could push Sprint toward T-Mobile. Still, that deal, which has been explored since at least 2013, has been held up over valuation concerns about Sprint and potential antitrust rejection. Government officials already told SoftBank in 2014 that they wouldn’t approve a deal between the two carriers, people familiar with the matter said at the time.

Sprint said Aug 1. that it lost subscribers in the last quarter after all three of its larger rivals added users, underscoring challenges in the business and the pressure on SoftBank. Though the company reported better-than-expected net income of $206 million, analysts still expect it to lose money for the full year, according to data compiled by Bloomberg.

Possible Contenders

Don’t forget Dish Network Corp., which has been unsuccessfully seeking a merger partner for years after exploring deals with Sprint, T-Mobile and AT&T’s DirecTV.

With so many willing participants and a still-low cost of capital on available debt, bankers could strike gold with several huge deals. But there’s also a very real chance nothing happens at all. That’s a recipe for banker anxiety.

“Most of the deals that get looked at don’t pass the simple smell test of balance sheet feasibility,” said Craig Moffett, an analyst at MoffettNathanson LLC.

Sprint and T-Mobile may still be the likeliest deal, but that doesn’t mean it’s likely, Moffett said.

“Even if you assume there’s an 80 percent probability of an announcement and you give the deal 50 percent odds of passing regulatory muster, there’s still only a 40 percent chance of that happening,” he said. “Could it be that there is less than a coin flip’s chance of any deal happening? Yeah, probably.”

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