Why T-Mobile wants to pay less for Sprint

T-Mobile US is hoping to pay less to acquire Sprint from the agreed price of $26 billion due to several reasons.
T-Mobile and Sprint merger
T-Mobile, owned by Deutsche Telekom and Sprint, owned by SoftBank, agreed the merger between the third and fourth largest U.S. wireless carriers in April 2018. They could not complete the deal because several U.S. states challenged the combination of Sprint and T-Mobile on antitrust grounds.

But a U.S. federal judge yesterday gave the companies the go ahead to complete the deal that will create a strong #3 operator in the United States with powerful 5G business. The approval will also create the rise of Dish Networks in the US telecom market. Telecom regulator Federal Communications Commission (FCC) has already welcomed the verdict of Judge Victor Marrero.

T-Mobile’s German parent, Deutsche Telekom, plans to ask Sprint’s majority owner, Japan’s SoftBank Group, to agree to a lower price, arguing that Sprint’s fortunes have deteriorated following their agreement two years ago, Reuters reported.

The market is assuming an approximately 9 percent cut to the deal price, Cowen analysts wrote in a research note on Monday after the companies’ shares soared on news that the merger could go ahead.

Reasons for a new price

Sprint’s market share in subscribing phone customers is down from 12.4 percent at the start of 2018 to 11.8 percent in the third quarter of 2019, according to Cowen analysts. Sprint shed 400,000 customers. Sprint’s debt rose from $33 billion to $34.1 billion.

SoftBank’s prospects have worsened, making it harder for it to walk away from a deal with T-Mobile US. The Japanese conglomerate is struggling to raise money from investors for its second $100 billion Vision Fund.

T-Mobile needs the merger to take on rivals Verizon Communications and AT&T in the race for the development of wireless 5G technology, analysts said.

“The credible fallback is if T-Mobile says they’re willing to walk away, and I don’t think anyone would take them seriously,” said Craig Moffett, telecom analyst at MoffettNathanson.

The merger would form a wireless giant with 126 million customers and help T-Mobile in the race for 5G by utilizing Sprint’s spectrum. It would also allow T-Mobile to save on costs by eliminating overlapping infrastructure.

Despite the decline in its business, the valuation of Sprint’s spectrum has doubled to $25 billion from 2016 to 2019, analysts at JPMorgan estimate. Both Verizon and T-Mobile are short on spectrum amid growing usage, according to New Street Research analysts.

“The primary leverage Sprint has is that T-Mobile’s growth and pending launch of 5G makes that spectrum depth very important to T-Mobile,” said Walt Piecyk, an analyst at LightShed Partners. “I would not be shocked if there was no change in price, because it’s been such a lengthy process, and the demand for spectrum continues to rise.”

“A renegotiation won’t be easy, and by far the most important objective for both sides will be to close and move on to integrating,” said Jonathan Chaplin, analyst at New Street Research.