Corporate Consolidation: The Implications of T-Mobile and Sprint’s $26B Mega Merger

North Americans pay among the highest cell phone rates in the world thanks to the hyper-concentration of power among top telecom corporations. A mere four companies control the U.S. market, namely AT&T, Verizon, T-Mobile, and Sprint, and that number will drop to three. T-Mobile prepares to swallow Sprint in a mega merger as soon as April 1st which will cause a fierce three-way battle for market share.  

Shares of Sprint and T-Mobile rose 77% and 12%, respectively, last week after a decisive legal victory from one of the most powerful U.S. prosecuting authorities. After months of skepticism about the deal and bearish investor sentiment, Victor Marrero, Senior Judge for the Southern District of NY, finally denies anti-competition claims from several State Attorney Generals, on the basis that a merger will equip T-Mobile and Sprint to better compete against their dominating rivals Verizon and AT&T.  

Being such a massive transaction, this deal will ripple out and affect a variety of stakeholders in the near future. Analysts will continue scrutinizing the industry impact and synergies, as these will affect share prices across the market. 

The initial deal made about a year ago involved trading 9.75 shares of Sprint for each T-Mobile share, but that ratio has recently been renegotiated to 11 shares per T-Mobile share. T-Mobile rose over 30% since then while Sprint dropped by about the same amount due to poor customer retention and bankruptcy worries. Deutsche Telekom, T-Mobile’s parent, considered their original offer already had a considerable premium and wished to renegotiate immediately given Sprint has underperformed. 

On the other hand, Masayoshi Son from SoftBank, Sprint’s parent, strongly opposed modifying the deal according to people familiar with the matter. Despite his reluctance, Sprint would continue declining as a standalone company due to dropping subscriptions and Mr. Son may not be able to afford another huge loss on SoftBank’s balance sheet, especially with the recent failure of WeWork.  

Additionally, Elliott Management, an activist hedge fund who built a $2.5B stake in SoftBank, will pressure SoftBank to return value to shareholders and promote transparency instead of relying on “Mr. Son’s instinctive approach”. That, along with the troubling emergence of $108B SoftBank’s Vision Fund 2, a second phase of investments in high-tech innovation firms, will force Mr. Son to avoid another big media blow.  

Nevertheless, SoftBank had some leverage on the table as T-Mobile will not wish to waste the hefty time and resources they have spent, as well as the synergies from Sprint’s infrastructure and sophisticated 5G technology. As a result, SoftBank lost a marginal amount of upside on the renegotiation, but still profited significantly since they purchased a 70% stake in Sprint for $12.1B back in 2012. The swift negotiation instead of a hostile, time consuming battle will enable T-Mobile to get started on a long transitional process and take advantage of synergies sooner.  

Benefits from the merger appear hopeful, with T-Mobile forecasting over $6B in run rate cost synergies representing an NPV of over $43B. Lower costs through a combined network and eliminating redundant retail stores will provide significant cost savings, which T-Mobile states they plan on using to lower phone plan fees, provide superior coverage to rural users, and invest in innovation to become a 5G leader.  

This comes with downsides as well, since removing retail stores for cost savings likely means massive layoffs for retail employees, which could lead to bad public relations or press scrutiny. Communication Workers of America, a prominent labour union, predicts over 24,000 job cuts due to redundant stores, which is much higher than the 3,000 jobs this deal is expected to create. T-Mobile seeks to alleviate concerns by selling BoostMobile to Dish and allowing retail Sprint employees to transfer there, but it's unlikely that everyone’s job will be secured. 

Overall, the merger will affect a variety of people in different ways. If you are an investor, be sure to follow implementation plans closely as this will determine the rate at which T-Mobile realizes synergy benefits. 

For customers, this deal may be beneficial since T-Mobile seems well equipped to carry out their plan of better coverage, lower costs, and 5G implementation if they are to acquire Sprint’s infrastructure and intellectual property. However, the consolidation of the industry means companies have even more power over their customers which may lead to negative implications in the longer term. Excitement about the impact of 5G, which will enhance service speeds exponentially, is warranted, but it appears the industry will become dominated by only a few powerful corporations.