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.

To receive instant analysis on the day’s business news from Tim Mueller, contact [email protected]. Check out a list of diverse assets for sale on SBN’s IT M&A Marketplace powered by IT ExchangeNet here.

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T-Mobile USA to soon sell iPhones, cut subsidies: CEO

LAS VEGAS, Wed Jan 9, 2013 — Deutsche Telekom AG unit T-Mobile USA will start selling the Apple Inc. iPhone in about three to four months and will enforce its plan to get rid of cellphone subsidies in a similar timeframe, according to CEO John Legere.

Legere declined to disclose details about the company’s agreement with Apple, except to say that T-Mobile USA’s timing for selling the smartphone would be sooner rather than later, along with its subsidy elimination plan.

“They’re all, I would call them, in three to four months as opposed to six to nine months, Legere told Reuters in an interview at the Consumer Electronics Show in Las Vegas.

T-Mobile USA said late last year it would eliminate handset subsidies in 2013 to give customers more flexibility and lower service prices. It said at the same time that it will also sell the iPhone, making it the last U.S. mobile provider to do so.

The company hopes to attract customers from bigger rivals like AT&T Inc. and Verizon Wireless  with the combination of selling iPhones and removing subsidies, which would be a first for the U.S. wireless industry.

The executive said he could possibly increase T-Mobile USA’s market share by 5 percent or higher from bigger rivals who still depend on subsidizing phones to give their customers a device discount in exchange for tying them into a two-year contract.

“If the old industry structure chooses to ignore what we do,” he said, “That’s a potential.”

T-Mobile USA, MetroPCS in talks over deal: sources

NEW YORK, Tue Oct 2, 2012 – Deutsche Telekom is in advanced talks to combine its T-Mobile USA unit with MetroPCS, three sources familiar with the situation said on Tuesday, as the German telecoms group seeks to stem a decline in customers at its U.S. business.

“A deal is close,” one source said, while another person said an announcement could follow later on Tuesday. A third person said a press conference was prepared for Wednesday.

Deutsche Telekom declined to comment, while MetroPCS was not immediately available for comment.

MetroPCS shares traded 21 percent higher at 1526 GMT.

Deutsche Telekom tried to sell its U.S. business T-Mobile USA, once a strong growth engine, to AT&T for $39 billion but fierce regulatory opposition scuppered the deal, leaving the German company with a $6 billion breakup package.

Ever since the AT&T deal collapsed, Deutsche Telekom has been looking for a solution for the unit which has to compete with much bigger rivals Verizon Wireless, AT&T Inc and Sprint Nextel.

In the second-quarter T-Mobile USA lost 205,000 customers in the United States and is expected to feel the pressure from the launch of the new iPhone, which it will not be selling in the U.S.

Speculation that T-Mobile USA and MetroPCS were considering a merger have come up in the past although analysts have pointed out that the two companies run on different technologies.

T-Mobile USA scorns Verizon spectrum sale offer

NEW YORK, May 10, 2012 – T-Mobile USA CEO Philipp Humm said his company was not interested in wireless airwaves that its biggest rival, Verizon Wireless, has offered to sell.

Verizon Wireless said last month that it would sell spectrum in the 700 megahertz frequency band if U.S. regulators approved its proposed $3.9 billion purchase of spectrum from cable operators, a deal that T-Mobile USA has loudly opposed.

Humm told reporters on a conference call on Thursday that the spectrum Verizon Wireless is proposing to sell is not good enough to help T-Mobile USA, a unit of Deutsche Telekom.

“For us, this spectrum is not interesting,” said Humm. Some of the spectrum risks interfering with TV stations that occupy nearby spectrum bands, he said.

The interference problems “will most likely take three to six years to resolve, if at all,” Humm said, adding that the remainder of the spectrum being offered does not cover a wide enough area to be useful.

T-Mobile USA would like to have a chance to bid on the spectrum Verizon Wireless is looking to buy. Analysts say this spectrum would be much more suitable for T-Mobile USA than the airwaves being offered by its rival.

T-Mobile USA has been scrambling to improve its business and stem customer losses, which were exacerbated by a nine-month period in 2011 when the company was focused on seeking approval for its proposed $39 billion purchase by AT&T Inc. That deal collapsed in December.

Humm declined to comment directly on a Bloomberg report that Deutsche Telekom was in talks with MetroPCS Communications with an aim of merging T-Mobile USA with MetroPCS.

Instead. He said Deutsche Telekom and T-Mobile USA were still working to strengthen the U.S. business and “to evolve T-Mobile USA to become a self-funding platform.”

The company managed to slow its customer losses in the first quarter, boosting its parent company’s results, announced on Thursday.

Department of Justice to seek delay or dismissal in AT&T trial

WASHINGTON ― The U.S. Justice Department said on Friday it would seek to stay or dismiss its lawsuit to stop AT&T Inc’s purchase of T-Mobile USA because AT&T withdrew its application with the Federal Communications Commission, which must approve the deal.

AT&T and Deutsche Telekom’s T-Mobile said in November that they had withdrawn the filing with the FCC to focus on the Justice Department’s antitrust challenge to the acquisition, valued at $39 billion.

“It’s not a real transaction until they file with the FCC,” Joseph Wayland, the Department of Justice’s lead attorney in the case, told Judge Ellen Huvelle.

AT&T’s attorney Mark Hansen sought to reassure Judge Huvelle that the transaction remained the same despite reports that the company could renegotiate the deal to make it more acceptable to regulators.

The Justice Department and FCC have said the merger would crimp competition. AT&T is the second-largest U.S. cellphone company and T-Mobile USA is the fourth largest.

The Justice Department sued to block the deal in August. That case is due to go to trial in February.

U.S. FCC to allow AT&T-T-Mobile merger application withdrawal

WASHINGTON ― U.S. communications regulators released a staff report criticizing AT&T Inc’s. $39 billion plan to purchase T-Mobile USA, even though they agreed on Tuesday to let the companies withdraw their request for approval.

AT&T and T-Mobile USA owner Deutsche Telekom AG said last week they wanted to withdraw their application with the Federal Communications Commission to focus on defending the transaction from an antitrust lawsuit brought by the U.S. Justice Department.

The FCC released on Tuesday an FCC staff report that found the touted benefits of the transaction do not outweigh the competitive disadvantages.

FCC officials cited staff findings that the deal would significantly diminish competition and lead to massive job losses.

The staff report also concluded the merger would not result in significantly more build-out of next generation 4G wireless service than would occur absent the transaction.

AT&T called the FCC’s decision to release the report “troubling.”

“It is simply a staff draft that raises questions of fact that were to be addressed in an administrative hearing, a hearing which will not now take place,” said Jim Cicconi, AT&T’s senior executive vice president of external and legislative affairs.

He added the report had not been made available to AT&T prior to the public release.

“We have had no opportunity to address or rebut its claims, which makes its release all the more improper,” he said.

AT&T has argued the deal will accelerate its expansion of high-speed wireless service to nearly all Americans and create jobs.

An antitrust expert with telecommunications experience expected the report would be troubling for AT&T during its court battle.

Public interest groups had urged the FCC to release the report, saying it likely came to conclusions AT&T would rather have kept quiet.

The FCC said the companies were free to come back to the commission with a new application.

FCC Chairman Julius Genachowski said the agency’s review has been focused on “fostering a competitive market that drives innovation, promotes investment, encourages job creation and protects consumers.

“These goals will remain the focus if any future merger application is filed,” he added.

The Justice Department went to court in August to oppose AT&T’s takeover of T-Mobile on antitrust grounds. A trial in that case is due to begin on Feb. 13.

What’s next for AT&T deal? Possible sale of 40 percent of T-Mobile assets

NEW YORK ― AT&T and T-Mobile’s corporate parent, Deutsche Telekom, acknowledged that an acquisition deal was in trouble in a Thanksgiving Day announcement. The companies said they had withdrawn, for now, their application to the Federal Communications Commission to join their cell phone operations. They also said that AT&T would take a $4 billion charge against earnings — the amount in breakup fees owed to Deutsche Telekom if the deal is scrapped.

The companies portrayed the withdrawal of the FCC application as a tactical move, after the commission chairman said earlier in the week that he would move to oppose the deal. The Justice Department filed an antitrust suit to block the merger in August.

Focusing on the antitrust trial, scheduled for February, the companies explained, would now be the first step. They vowed to continue to pursue their bold plan to combine the second- and fourth-largest cell phone carriers in the United States.

But the companies’ ambitions must be scaled back if they want any chance at a deal, analysts say. To address the objections of the Justice Department and FCC that a merger would be anticompetitive, AT&T could agree to sell off 40 percent or so T-Mobile’s assets to wireless rivals, they say.

The policy goal, analysts say, would be to strengthen wireless competitors beyond the big two, Verizon Wireless and AT&T. So sales of mobile spectrum, cell towers and customers could not be made to Verizon, but to others, like Sprint and MetroPCS, the third- and fifth-largest carriers.

Or perhaps assets could be sold to a well-heeled foreign company that, unlike Deutsche Telekom, is increasing its investment in the United States: América Móvil, headed by the Mexican billionaire Carlos Slim Helú. Slim is a major shareholder in The New York Times Co.

Creative deal-making, analysts note, would be required to forge alliances and supply cash for spinoff purchases. The list of potential participants, they say, includes private equity firms, like SilverLake Partners, and cable companies, like Comcast and Time Warner, which own spectrum and whose Wi-Fi networks can work in tandem with cell networks.

Each of the options would present obstacles. And it is not clear that AT&T would be interested in a drastically scaled-down deal. Yet the company has consistently argued that its main motivation for pursuing T-Mobile is to acquire scarce wireless spectrum, so AT&T can quickly build out high-speed, next-generation network capacity to improve its service.

“If that is its goal, then AT&T has to explore ways to salvage as much spectrum out of the deal as it can,” said Kevin Werbach, an associate professor at the Wharton School of the University of Pennsylvania and a former technology policy official at the FCC.

FCC chief seeks added review of AT&T/T-Mobile deal

WASHINGTON ― AT&T Inc was dealt a blow Tuesday as the top U.S. communications regulator sought to have its planned $39 billion purchase of T-Mobile USA sent to an administrative law judge for review.

Federal Communications Commission Chairman Julius Genachowski sent a draft order to his fellow commissioners, citing FCC staff findings that the deal would significantly diminish competition and lead to massive job losses.

“The record clearly shows that — in no uncertain terms — this merger would result in a massive loss of U.S. jobs and investment,” a senior FCC official said.

The agency also concluded that the merger would not result in significantly more buildout of next generation 4G wireless service than would occur absent the transaction.

AT&T argues the deal will accelerate its expansion of high-speed wireless service to nearly all Americans.

The U.S. Justice Department went to court in August to oppose AT&T’s purchase of T-Mobile from Deutsche Telekom AG on antitrust grounds. A trial in that case is due to begin on Feb. 13.

Any administrative hearing at the FCC, which is charged with evaluating the public interest merits of the deal, would begin after the antitrust trial, an FCC official said.

AT&T called the FCC action “disappointing” and disputed the agency’s conclusion that its T-Mobile deal, with $8 billion in broadband investment and commitments on job preservation and enhancement, would result in the loss of jobs and investment.

The FCC recently said its $4.5 billion annual fund to promote broadband to underserved communities would create 500,000 jobs over the next six years.

“This notion, that when government spends money on broadband it creates jobs, but when a private company spends money it doesn’t, is clearly wrong on its face,” said Jim Cicconi, AT&T’s top executive for external and legislative affairs.

DOJ ready to take ATT to court, U.S. Attorney General tells lawmakers

WASHINGTON ― The Justice Department’s antitrust division is prepared to take AT&T Inc. to court to stop its acquisition of T-Mobile USA from Deutsche Telekom AG , U.S. Attorney General Eric Holder told lawmakers on Tuesday.

Senator Herb Kohl, chair of the committee’s antitrust subcommittee, acknowledged that Holder was recused in the matter but asked if the department would be in the case “for the long haul.”

Holder responded that “people in the antitrust division are committed to seeing this through.”

“There is a trial team that is in place and they are ready and eager to go to court,” he said.

T-Mobile lines up against Apple in Samsung lawsuit on selling Galaxy products

BELLEVUE, Wash. ― T-Mobile USA has become the latest mobile provider opposing Apple’s (AAPL.O) bid to stop Samsung Electronics Co. from selling some Galaxy products in the United States, according to a court filing.

The move by T-Mobile on Wednesday follows a similar position taken last week by Verizon Wireless. T-Mobile, which cited 2011 holiday sales as one of its primary concerns, is the fourth largest U.S. mobile service, while Verizon is the biggest.

The legal battle between Apple and Samsung has been building since April, when Apple sued Samsung in a California federal court for infringing its intellectual property rights.

Samsung is the leading user of the Google Android platform. Apple claims the South Korean firm’s Galaxy line of mobile phones and tablets “slavishly” copies the iPhone and iPad.

Apple has asked a judge to issue an injunction that would prevent Samsung from selling some Galaxy products. A hearing on the injunction request is scheduled for Oct. 13.

An order against Samsung would “unnecessarily harm” T-Mobile and its customers, T-Mobile said in a court filing on Wednesday.

“At this late date, T-Mobile could not find comparable replacement products for the 2011 holiday season,” the company argued.

T-Mobile’s marketing campaigns “prominently feature” the Galaxy S 4G phone and Galaxy Tab 10.1, and the company has also ordered holiday inventory, it said in the filing.

“These investments cannot be recouped easily,” the company said.

Apple spokeswoman Kristin Huguet on Wednesday referred to earlier statements, saying that Apple needed to protect its intellectual property when companies steal its ideas.

Other carriers such as AT&T Inc. and Sprint Nextel have not yet weighed in on the debate. Representatives for the companies had no immediate comment.

In a statement, T-Mobile said it respects intellectual property rights but that an injunction “is a drastic and extraordinary measure.”

Earlier this week, Verizon said that disputes involving intellectual property should not interfere with the free flow of the newest 4G devices.

Samsung unveiled an agreement with Microsoft on Wednesday for the development and marketing of Windows phones, as well as a wide patent cross-licensing deal. Microsoft will get royalties for Samsung devices that run the Android platform.

T-Mobile is owned by Deutsche Telekom.