Tim Mueller’s Transaction Analysis: New IT M&A Deals May 2

T-Mobile, Sprint Shares Take a Hit Following Proposed Blockbuster Takeover

Financial Information*

  • Transaction Value $26.5B
  • EV/LTM Revenue 1.79x
  • EV/LTM EBITDA 5.19x

Transaction Facts

  • T-Mobile US (Nasdaq: TMUS) and Sprint Corporation (NYSE: S) announced yesterday their definitive agreement to merge in an all-stock transaction at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each T-Mobile share — implying a a total value of approximately $26.5B.
  • Based on Friday’s closing prices, this represents a total implied enterprise value of approximately $59 billion for Sprint, and $146 billion for the combined company.
  • Though management for both companies projected run rate cost synergies of over $6 billion, representing a net present value of $43 billion in synergies, investors have not reacted positively following the news. Sprint shares fell around 14 percent, while T-Mobile shares fell around 4 percent today — suggesting the market’s skepticism over the companies’ ability to obtain regulatory approval.
  • The combined company will be named T-Mobile.

Beyond the World of Telecom

  • Regulatory Hurdles: T-Mobile and Sprint, the nation’s third- and fourth- largest wireless companies, attempted but failed to combine in 2014 under the Obama administration; the Justice Department’s Antitrust Division and the FCC both blocked it. It is not yet clear how this deal will play out under the Trump administration, which sued to stop AT&T’s proposed acquisition of Time Warner earlier this year. Taking a major competitor out of the market will effectively bring the cellular service market down to only three options: Verizon, AT&T, and T-Mobile.
  • Business-Friendly: T-Mobile and Sprint, however, maintain that the deal will be pro-competitive by creating a new rival in a market that is essentially a Verizon and AT&T duopoly. As of late, Verizon has been performing well, reporting a rise of 32 percent in first-quarter net income last week, while AT&T reported a decline of 3.5 percent.
  • Setting A Precedent: The deal has greater ramifications beyond the telecom space and could set the stage for how future blockbuster M&A deals play out. First, how AT&T’s battle with the Justice Department over its bid for Time Warner could be the precedent that affects T-Mobile’s plan. There are notable differences, however: the AT&T/Time Warner case involves a vertical deal that joins two companies not in direct competition against each other, while the Sprint/T-Mobile case is a horizontal deal combining two direct competitors in a tight market. Horizontal mergers are more likely to face deeper scrutiny.
  • Debt Pile: Sprint’s high enterprise value, relative to its equity, stands out, especially considering the company’s debt. At the end of 2017, Sprint had nearly $33 billion in long-term debt. Being under a much larger asset pool and a stronger liquidity profile as a result of the deal may give Sprint the boost it needs. However, according to a joint company presentation yesterday, the combination will produce a total debt of as much as $77B.
  • Consumer-Centric: Both companies stressed the deal would be able to accelerate its efforts to implement a broad and deep 5G network as wireless, video and broadband converge. Citing statistics that T-Mobile deployed nationwide LTE twice as fast as Verizon and three times faster than AT&T, the company expects better end results for the consumer. In addition, both companies vowed lower prices through increased competition. In the past, T-Mobile aggressively cut prices by offering bargain plans with no contracts, and gained market share as the overall cost of wireless service decreased notably. According to government statistics, the cost for service decreased 19 percent in the last five years.

For more information about this transaction, click here to read the press release.

*Financial information from the press release and FactSet.

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Clearwire, Sprint set up $120 million breakup fee

OVERLAND PARK, Kan., Tue Dec 18, 2012 — Sprint Corp. promised to pay Clearwire Corp. a $120 million breakup fee if its $2.2 billion purchase of roughly half of the smaller wireless service provider does not go ahead.

At the same time, Clearwire said on Tuesday it agreed to a “no-shop” provision, meaning it cannot seek other offers but could consider unsolicited offers.

Clearwire and Sprint, its majority owner, announced details of their merger agreement in a regulatory filing the day after Sprint agreed buy out the rest of Clearwire for $2.97 per share.

Clearwire shares traded below the offer price at $2.86, down 5 cents or 1.7 percent on the Nasdaq. Sprint was off 9 cents, or 1.6 percent, at $5.47 on the New York Stock Exchange.

Some shareholders said they were disappointed by the price, which requires approval from a majority of Clearwire’s minority shareholders. While one shareholder is looking for support for a class action lawsuit against the deal, another held out hope for a higher bid.

Clearwire’s chief executive said Monday that Sprint’s offer was its best option, and that Clearwire could face a risk of bankruptcy if that deal is not approved.

The filing said Clearwire would be restricted from providing information to or engaging in discussions or negotiations with third parties regarding an acquisition proposal, subject to certain exceptions.

It did not disclose the exceptions in the filing.

The Clearwire deal is conditional on the sale of a 70 percent stake in Sprint to Japan’s Softbank Corp. for $20 billion. That deal is expected to close around mid-2013.

Sprint would have to pay the breakup fee if the Softbank deal does not happen, if it or Clearwire terminates the agreement, or if their deal has not been consummated on or before Oct. 15, 2013, according to the filing.

Stifel Nicolaus analyst Christopher King said the decline in Clearwire’s shares did not appear to indicate the deal was in any danger of being blocked.

“It’s pretty much a done deal,” King said.

So far, Sprint has support for the deal from Softbank and from at least three Clearwire shareholders owning 13 percent of the company — Intel Corp., Comcast Corp. and cable company Bright House.

Sprint second-quarter loss widens on Nextel charges

NEW YORK, Thu Jul 26, 2012 – Sprint Nextel Corp. on Thursday posted a wider quarterly loss as it took hefty charges for the planned shutdown of its old Nextel network.
The No. 3 U.S. mobile service reported a loss of 246,000 subscribers in the quarter, compared with the average expectation of about 203,000 subscriber losses, according to five analysts contacted by Reuters.
The customer numbers included losses of 688,000 subscribers on the Nextel network, which Sprint bought in 2005. On top of the work Sprint is doing to shut down the older network, the company is spending billions of dollars to upgrade its own network.
In contrast, Sprint’s bigger rivals Verizon Wireless and AT&T Inc., both added customers in the quarter.
Sprint, which committed to spend $15.5 billion on Apple Inc. iPhones over the next few years, said that its iPhone sales had declined in the quarter.
The quarterly loss widened to $1.37 billion or 46 cents per share, from $847 million, or 28 cents per share in the year-ago quarter. The loss included a $782 million depreciation charge for the network decommissioning and an impairment cost related to the share price of its Clearwirel Corp. venture.
Net operating revenue rose to $8.8 billion from $8.3 billion. Analysts expected $8.727 billion, according to Thomson Reuters I/B/E/S.

Sprint shares down, analyst cites bankruptcy risk

OVERLAND PARK, Kan., Mon Mar 19, 2012 – Shares in Sprint Nextel fell more than 4 percent after an analyst report said there is an increasing risk that the No. 3 U.S. mobile provider could end up filing for bankruptcy as the debt-laden company faces steep costs due to factors such as its iPhone deal with Apple Inc.

Bernstein analyst Craig Moffett downgraded Sprint shares to “underperform” from “market-perform” saying that the company will face “new and larger risks” if Apple launches a high-speed iPhone later this year based on a technology that Sprint’s bigger rivals have installed more widely than Sprint.

“To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk. And notwithstanding a recent rally in Sprint shares, we believe that risk is rising,” Moffett said in a research note.

A Sprint spokesman was not immediately available to comment.

Sprint shares were down 13 cents, or 4.5 percent, to $2.76 in late morning trading on the New York Stock Exchange after the report was released.

LightSquared loses main business network partner Sprint

WASHINGTON, Fri Mar 16, 2012 – Hedge fund manager Philip Falcone’s LightSquared has lost its main business partner, Sprint Nextel Corp., which returned $65 million in payments to his telecommunications startup.

Sprint said on Friday it will exercise its right to scuttle the $9 billion agreement that would have allowed LightSquared to use a network Sprint is building to sell its own high-speed wireless service.

The development, which was expected, is another setback for LightSquared, but it does provide the company more cash as it fights for survival.

Sprint had the right to back out of the deal if LightSquared failed to get regulatory approval. Regulators said LightSquared’s network would interfere with the Global Positioning System used by airlines, the military and others.

Last month, the U.S. Federal Communications Commission proposed to indefinitely suspend LightSquared’s authority to use its satellite spectrum for cellular use.

Since then, the company said it would lay off nearly half of its 330 employees. Sanjay Ahuja, a telecommunications industry veteran, also stepped down as chief executive just two weeks after the major blow from regulators.

“We remain open to considering future spectrum hosting agreements with LightSquared, should they resolve these interference issues, as well as other interested spectrum holders,” Sprint said in a statement.

Clearwire soars as Sprint eases liquidity concerns

NEW YORK ― Sprint Nextel Corp., the No. 3 U.S. mobile provider, agreed to pay up to $1.6 billion to Clearwire Corp. in the next four years, including a network pact and a potential equity infusion, easing concerns about a liquidity crisis at Clearwire.

Clearwire, for which some investors had bankruptcy fears, saw its shares rise more than 20 percent in morning trade after it said on Thursday that it will be able to make a $237 million debt interest payment due Dec. 1.

The stock had closed up 13 percent the day before after a Reuters report that Sprint was expected to reach a funding agreement for Clearwire.

Wireless service provider Clearwire, which is majority owned by its biggest customer Sprint, last month told the Wall Street Journal that it might skip the interest payment to conserve cash as it needs almost $1 billion in new financing to keep operating and fund a network upgrade.

At the time analysts said the comment was likely a negotiating tactic aimed at forcing Sprint’s hand.

Sprint, which itself recently raised $4 billion from a bond sale, said it would pay Clearwire $926 million for unlimited use of its current wireless network in 2012 and in 2013, after which its payments would depend on how much customers used the service.

In return Clearwire committed to keep that network — based on WiMax technology — up and running at least until 2015.

Sprint would also pay Clearwire up to $350 million in a series of prepayments, over two years at most, for capacity on a high-speed service Clearwire hopes to build using a faster technology known as Long Term Evolution, as long as Clearwire achieves certain network targets by June 2013.

Sprint, which has minority voting rights in Clearwire, also committed to providing more equity funding “in the event of an equity offering.”

If Clearwire raised between $400 million and $700 million in new equity, Sprint said it would participate in the offering on a pro rata basis up to $347 million, consistent with its current voting interest.

Sprint files suit to block proposed AT&T and T-mobile transaction

OVERLAND PARK, Kan. ― Sprint Nextel today brought suit against AT&T Inc., AT&T Mobility, Deutsche Telekom and T-Mobile seeking to block the proposed acquisition as a violation of Section 7 of the Clayton Act. The lawsuit was filed in federal court in the District of Columbia as a related case to the Department of Justice’s suit against the proposed acquisition.

“Sprint opposes AT&T’s proposed takeover of T-Mobile,” said Susan Z. Haller, vice president-litigation, Sprint. “With today’s legal action, we are continuing that advocacy on behalf of consumers and competition, and expect to contribute our expertise and resources in proving that the proposed transaction is illegal.”

Sprint’s lawsuit focuses on the competitive and consumer harms which would result from a takeover of T-Mobile by AT&T. Sprint claims the proposed takeover would:

Harm retail consumers and corporate customers by causing higher prices and less innovation.

Entrench the duopoly control of AT&T and Verizon, the two “Ma Bell” descendants, of the almost one-quarter of a trillion dollar wireless market. As a result of the transaction, AT&T and Verizon would control more than three-quarters of that market and 90 percent of the profits.

Harm Sprint and the other independent wireless carriers. If the transaction were to be allowed, a combined AT&T and T-Mobile would have the ability to use its control over backhaul, roaming and spectrum, and its increased market position to exclude competitors, raise their costs, restrict their access to handsets, damage their businesses and ultimately to lessen competition.

Sprint offers AT&T spectrum solution to FCC without merger

WASHINGTON ― AT&T Inc. could greatly expand its network capacity for a fraction of the cost it plans to shell out to buy T-Mobile USA, Sprint Nextel said Monday.

Sprint, a vocal opponent of the deal, said it would present the Federal Communications Commission with a technical analysis detailing the actions AT&T could take to improve its network without acquiring T-Mobile USA.

The proposed merger, which requires FCC and Department of Justice approval, would concentrate 80 percent of U.S. wireless contract customers in just two companies ― AT&T/T-Mobile and Verizon Wireless.

Sprint said its filing to the FCC will assert that AT&T could forgo the T-Mobile takeover and increase its network capacity by more than 600 percent by 2015 by simply putting its current resources to better, more efficient use.

AT&T argues that it needs the spectrum of Deutsche Telekom AG’s T-Mobile USA to expand high-speed services faster and improve its network performance, criticized by consumers for dropped calls and slow data speeds.

Sprint, considered the carrier with the most to lose from the AT&T deal, as it would put it in a distant third place in the U.S. market, called this rationale unfounded.

“AT&T could increase its capacity by developing its warehoused spectrum, accelerating its 4G network buildout, and implementing a more efficient network architecture,” Sprint said in a statement.

A 600 percent boost in capacity could handle AT&T’s projected data demands and would cost far less than the $39 billion AT&T would spend to take over T-Mobile, Sprint said.

An AT&T spokesman responded by criticizing Sprint’s transfer of its network management to Ericsson. “A company that has outsourced the management of its own network shouldn’t be giving advice to others.”

The public interest group Public Knowledge also said on Monday it would file a preliminary economic and technical report questioning both AT&T’s spectrum constraint claims and T-Mobile USA’s financial hardships.

“The report argues both companies have many options to increasing their high-speed data networks,” a spokesman for the group said in a statement.