It isn’t often companies have reason to cheer for a competitor’s deal. But if Sprint moves forward with a bid for T-Mobile US, as it is considering, AT&T and Verizon Wireless might not necessarily object to having a bigger rival to deal with. But that, in turn, might put the kibosh on any deal happening at all.
The past year has seen a raft of consolidation at the lower end of the wireless market, including Sprint’s purchase of Clearwire, the acquisition of MetroPCS by T-Mobile and AT&T’s deal to buy Leap Wireless.
But unlike those deals, combining Sprint and T-Mobile, the No. 3 and No. 4 U.S. carriers by subscribers, respectively, would eliminate a national provider, reducing the choice for most U.S. consumers from four to three.
A deal would be a boon for the two carriers, offering greater scale, significant spectrum holdings and one fewer competitor. But it would also benefit Verizon Wireless and AT&T. Eliminating a competitor would mean less pressure from an upstart willing to undercut prices as T-Mobile has done.
In that sense, all telecom investors should cheer a merger.
But it is exactly that rationale for a Sprint/T-Mobile tie-up that would likely give regulators pause. In rejecting AT&T’s deal to buy T-Mobile two years ago, the Federal Communications Commission and the Justice Department made clear that they wouldn’t allow a move to three national players from four. Granted, Sprint isn’t as dominant an acquirer as was AT&T. But while regulators might have been convinced to reconsider that stance if Sprint and T-Mobile were still foundering, the U.S. wireless market’s recent trajectory seems only to have validated their decision.
Since it bought MetroPCS, T-Mobile has gone from losing subscribers to taking market share through aggressive pricing and network investment. That disruption may already be benefiting other wireless customers: AT&T recently cut prices to defend its market share.
Sprint is poised to invest heavily in its own network, thanks to an infusion of capital from its new majority owner, SoftBank. Competition also appears to be pushing other carriers the same way. Capital investment in wireless rose almost 15% in 2012 and should rise about 20% this year, according to UBS.
Moreover, the FCC may be loath to lose a potential bidder in coming spectrum auctions, particularly those for broadcast spectrum from which it has said it hopes to raise $20 billion. Sprint/T-Mobile would also have more than twice as much spectrum as Verizon or AT&T. Little of this would be more valuable low-band spectrum held by Verizon and AT&T. But the sheer scale of Sprint/T-Mobile’s spectrum holdings means allowing them to be combined could be tantamount to giving Verizon and AT&T a free pass to acquire more, according to research firm MoffettNathanson.
When it comes to a deal with T-Mobile, investors shouldn’t expect regulators to simply patch through Sprint’s call.
Write to Miriam Gottfried at [email protected]