TMobile, MetroPCS Deal Leaves Sprint Scrambling

NEWS ANALYSIS: Sprint's board is having second thoughts about merging with MetroPCS, now that the latter has committed to Deutsche Telekom's T-Mobile.  

T-Mobile and MetroPCS have stated their commitment to a merger, but with the union far from finalized, Sprint is reconsidering whether it was right to walk away from a nearly finalized deal with MetroPCS in February. According to Bloomberg, Sprint's board plans to meet Friday, Oct. 5, to discuss whether it should present MetroPCS with a counteroffer to T-Mobile parent company Deutsche Telekom (DT).

As part of that deal, MetroPCS investors will receive $1.5 billion in cash and 26 percent of the new company. Bloomberg earlier this month reported that Sprint's stock was trading at twice the value it was at in February, putting Sprint in a nice position for an acquisition. Piper Jaffray analyst Chris Larsen, telling Bloomberg Oct. 5 that a deal between MetroPCS and Sprint would "just make sense," said the latter could pay $15 a share for MetroPCS, which closed the day before at $12.69, and still come out ahead. However, complicating the deal since Sprint's board voted against it in February is the $150 million break-up free MetroPCS would have to pay were it to back away from DT.

If T-Mobile were to pull out, the fee would be $250 million. Also notable is that Sprint and T-Mobile have also each considered the other. In March 2011, Sprint was said to be in talks with DT about acquiring T-Mobile. Later that year, after AT&T walked away from its nine-plus-month effort to acquire T-Mobile—a merger the federal government ultimately disapproved of, believing it would hurt competition and ultimately raise prices for consumers—DT received a sorry-that-didn't-work-out gift of spectrum and approximately $4 billion; money that DT reportedly considered putting toward purchasing Sprint.

Sprint was initially also a vocal opponent of AT&T's acquisition of T-Mobile, which it's been suggested was motivated less by a concern for the wellness of the market than by a desire to keep T-Mobile available. Sprint CEO Hesse told investors in Sept. 2011, BGR reported, that the Justice Department's sentiments toward the AT&T deal weren't about necessarily maintaining four major carriers. A "very strong argument" could be made, he said, that they would support a merger of Sprint and T-Mobile.

With analysts believing that consolidation in the market is inevitable, and Sprint's two major prospects teaming up, Sprint has a number of motivations for stepping between them and working out a deal with MetroPCS. Sprint's network, unlike T-Mobile's, is compatible with MetroPCS's. After years of suffering the repercussions of its purchase of the incompatible iDEN network in 2005, Sprint thoroughly understands the benefit of buying compatible technology. (DT, well aware of Sprint's iDEN debacle, has made sure to point out that its network transition will be a different story).

Additionally, Sprint, like MetroPCS, is a strong player in the prepaid space and would benefit from having the smaller carrier on its side, rather than competing against it. IDC analyst Carrie MacGillivray, in an Oct. 3 report, wrote that a combined T-Mobile and MetroPCS would have "more than 14.5 million retail prepaid subscribers, which will directly challenge the second-place carrier in the prepaid segment—Sprint—with 15.4 million subs.

" The question, then, she added, would be whether the pair can "capitalize on the prepaid market growth and take share from its closest rival—Sprint." Analyst Eric Costa, with Technology Business Research, says that there's of course also the matter of spectrum. "I do think Sprint is a little threatened by the new prepaid segment that would be created by the Metro/T-Mobile merger, but Sprint still has a strong multi-brand prepaid strategy and is more concerned with making sure it doesn’t miss out on a chance to make a deal that provides them with additional spectrum holdings," he told eWEEK.

If Sprint doesn't step in now, Costa added, it "would lose two key targets" and be left with only future options of Leap Wireless, Dish or Clearwire. In addition to spectrum, MetroPCS comes with a fully deployed Long Term Evolution (LTE) network. Sprint has said it will have LTE in 100 markets by the end of the year, but for now its LTE footprint is dwarfed by those of Verizon Wireless and AT&T. Should MetroPCS spurn Sprint's last-minute advances—should Sprint make any—and continue with T-Mobile, the pairing will put pressure on Sprint's revenue growth and its ability to add new subscribers, wrote IDC's MacGillivray.

Indeed, data from Kantar Media suggests T-Mobile and MetroPCS could be a strong pairing—and a problem for Sprint—given that, one, T-Mobile has been successful at attracting away customers from Verizon and Sprint while MetroPS has luck attracting away AT&T subscribers, and two, their churn data shows very little overlap between their customers, suggesting the merger would offer the benefits of scale and spectrum without the risk of "cannibalizing" customers.

Should MetroPCS and T-Mobile team up, Sprint will need do what every love-triangle loser has learned: keep busy. Sprint, wrote IDC's MacGillivray, should take advantage of the pair's inevitable "growing pains" and "stay laser-focused on its business and its message of simplicity and unlimited plans, which have continued to resonate with customers."

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