​T-Mobile Sprinting Toward 5G

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By: R. Scott Raynovich

Over the weekend, T-Mobile announced that it has gotten an agreement on its much anticipated bid for Sprint, which has been on-and-off of merger deals for years. The merger drivers are very clear: To gain additional scale to compete with AT&T and Verizon and put T-Mobile in a position to deploy 5G technology, which promises to be very expensive.

T-Mobile CEO John Legere and Sprint CEO Marcelo Claure aggressively positioned the deal as a catalyst to speed up 5G deployment, which they said is now being led by China. While this positioning makes sense -- as a merged entity the larger company would have economies of scale benefits in rolling out the next-generation wireless technology -- it's also a good argument to convince regulators to approve the deal. Both Legere and Claure did a media blitz today to reinforce these points.

Claure said in a statement that leadership in 5G technologies resides in China and Korea.

“It is critically important that America and American companies lead in the 5G era,” the companies said in their joint announcement. “Early U.S. leadership in 4G fueled a wave of American innovation and entrepreneurship that gave rise to today’s global mobile Internet leaders, creating billions in economic value and job growth.”

There may be other barriers in addition to regulators, including shareholders. The companies have already talked about merging but have failed before. Last year they abandoned merger talks in October 2017. This morning on an ominous note, Sprint shares took an ugly tumble on the news, falling 15 percent to $5.50 per share.

The merger represents the combination of the third and fourth largest wireless service providers in the United States. Sprint last week was valued at $26 billion and T-Mobile was valued at about $55 billion. However, both companies lost value after the deal was announced. In addition to Sprint shares falling 15% on Monday, T-Mobile lost about 7% in Monday trading.

If the deal proceeds, Legere would remain as CEO of the combined companies and Deutsche Telekom would own about 40 percent of the combined company with Softbank owning slightly less than 30 percent. Softbank bought at 70 percent stake in Sprint in 2012. Over time, it accumulated more shares to increase its stake.

This latest proposed merger between T-Mobile and Sprint comes six months after the two companies ended merger talks in October 2017. Softbank owns a majority of Sprint, and its CEO Masayoshi Son has gone back and forth on strategies for the Sprint assets.

It hasn't always been easy. At the same time, CNBC points out, T-Mobile's Legere and Sprint's Claure have a history of trading barbs on social media.

As in many merger deals, the primary driver is to reduce costs as the two companies combine resources, eliminate overlapping budgets, and drive economies of scale. The timing is good, with the major global carriers focused on two big technological trends: The virtualization of their networks, which can reduce by capital expense (capex) and operating expense (opex), as well as the drive to new services highlighted such as 5G.

Many experts believe that virtualization in the carrier networks, frequently referred to as network functions virtualization (NFV), will be key to maximizing a return on the investment in 5G, which is going to cost a huge amount of money.

After years of attempted mergers, it looks like T-Mobile and Sprint finally have a deal. They can now only hope that it proceeds smoothly with shareholders and regulators, because this may be the last chance to merge before the transition to 5G.