Sprint this week finds itself in the very awkward position of denigrating its network in a bid to argue for regulatory approval of its proposed acquisition by T-Mobile US. For the better part of the last year, both companies have primarily made their case for the merger by highlighting the benefits of a combined company. Sprint’s latest filing with the Federal Communications Commission (FCC) is a change in direction and strategy.
“Sprint is in a very difficult situation that is only getting worse,” Sprint’s lawyers wrote, adding that the company’s network lacks coverage and consistency. “Sprint’s lack of low-band spectrum is at the root of these network problems. … Simply put, Sprint is not on a sustainable competitive path.”
While critics of the proposed $26 billion deal bemoan the loss of a competitor in the wireless space, Sprint says its ability to be an effective competitor will be diminished if the merger is not approved. “Sprint’s network is deficient, it is losing customers, and it cannot generate enough cash to invest in its network, pay its debt obligations, and compete effectively,” the company wrote in the filing.
Mountain of Debt
Sprint’s net debt has more than doubled to at least $33 billion since 2011. And yet, as recently as March 2018, less than two months before the T-Mobile US deal was announced, Sprint CEO Michel Combes (who was president and CFO at the time) argued that Sprint could still finance the buildout of a 5G network. Combes and his executive team have since walked back from those statements.
“Quite frankly, this was a breath of fresh air,” Chris Antlitz, telecom principal analyst at Technology Business Research, told SDxCentral in a phone interview. “They are being marginalized, they can’t stay competitive, the network is not comparable, the competition has been out-competing them for years, and something has to give here.”
Roger Entner, founder and lead analyst at Recon Analytics, described Sprint’s latest move as a desperate attempt to regain momentum for regulatory approval. “It’s a gigantic game of chicken,” he said in a phone interview, adding that the shift in strategy does not work in the besieged company’s favor.
Within 24 hours of the FCC filing being made public, The Wall Street Journal reported that Justice Department staffers have told T-Mobile US and Sprint that their merger is “unlikely to be approved as currently structured.” T-Mobile CEO John Legere in a tweet said the premise of the story is “simply untrue,” but declined to comment further.
“Regulators know it is not illegal to embellish what they tell the FCC, but it is illegal to [knowingly lie] to investors,” Entner said, calling into question the veracity of Sprint’s claims. “It is a problem that can absolutely be fixed if their 80% owner (SoftBank) would be willing to dish out money.”
SoftBank’s Big Gamble
While SoftBank, a Japan-based multinational with holdings in tech and telecom, has access to capital, it is also heavily leveraged, according to Antlitz. When SoftBank took on more debt to infuse Sprint with capital it agreed to a stipulation in those debt covenants to not take on any more debt for Sprint, Antlitz said. “SoftBank realizes this is their best chance to make back what they’ve lost on this move.”
Entner shows less deference to the situation that Sprint and SoftBank are in now because the issues they face are of their own doing. Sprint could have bid on low-band spectrum in 2017, for example, but it chose not to participate in that auction. “You can’t force somebody to be successful and you can’t expect the government to rescue you. It’s this increasing trend of privatizing profits and socializing losses,” Entner said
“T-Mobile came back from worse,” he explained, citing T-Mobile US’ argument regarding a previous attempt to merge with larger rival AT&T. “T-Mobile had exactly the same arguments with the AT&T merger and when that didn’t go through look what happened, [Deutsche Telekom] had no choice but to invest and now they’re beating everybody else.”
If the merger fails and SoftBank doesn’t invest further in Sprint, the outlook is grim. Job losses, another issue often cited as a potential negative outcome of the merger, could be even worse under that scenario, Antlitz explains. “The reality is if this deal does not go through, we could see more job erosion,” he said, adding that bankruptcy and a major reorganization are viable risks. “Marginal players are not competitive anymore. … Market forces are more powerful than anything that they can try to do, so there eventually comes a point where the music stops. … Sprint is in that situation.”
Sprint Plays the Victim
Sprint is now embracing that losing mentality just as it and its competitors begin to upgrade their respective networks to 5G. “Absent completing its transaction with T-Mobile, Sprint will have limited options, and is likely to be forced down either a repositioning path and/or a restructuring path,” the company wrote in the FCC filing.
“Sprint’s standalone competitive future is in peril. It does not have the network assets required to improve its coverage and consistency problems, and the move to 5G will only make these deficiencies more apparent,” it added. “As a result, Sprint is losing customers and scale, which further reduces Sprint’s ability to generate the revenues required to invest in its business.”
Analysts have been tempering expectations for the merger’s approval of late. MoffettNathanson recently put the odds for approval at 33%. “Before this desperation letter I thought it was like 60/40, but my expectations just went down because you only write these desperation letters when you’re desperate,” Entner said.
Antlitz declined to put a number on it, but said: “I don’t think this is dead yet. I think there is still life to this. I think there’s a strong case for doing this and I think at the 11th hour we might see a breakthrough.”
The regulatory review of the merger, which has been through three lengthy pauses, is ongoing with the informal 180-day shot clock now at day 135. “It would be a major mistake if they do not let this go through,” Antlitz said.
“If the deal does not go through, T-Mobile might look for alternatives to get more spectrum,” he said. “If they don’t get Sprint, I would keep an eye on Dish. … I think that Sprint is plan A and I would say Dish is plan B. What T-Mobile needs at the end of the day is they need spectrum. That is the No. 1 asset that they need from the acquisition.”
T-Mobile hasn’t responded to Sprint’s FCC filing, but as Entner concludes: “What is T-Mobile supposed to say? We’re going to slaughter them if we can’t eat them?”