T-Mobile agrees to acquire Sprint for $26 billion

(Reuters) — T-Mobile agreed on Sunday to acquire peer Sprint, in a $26 billion all-stock deal that will combine the third and fourth largest U.S. wireless carriers and is expected to attract regulatory scrutiny over its impact on consumers.

The agreement caps four years of on- and off- talks between the companies, setting the stage for the creation of a carrier with 127 million customers that will be a more formidable competitor to the No.1 and No.2 wireless players, Verizon and AT&T.

U.S. regulators, which have challenged in court AT&T’s $85 billion deal to buy U.S. media company Time Warner, are expected to grill Sprint and T-Mobile on how they will price their combined wireless offerings.

The merger will create the highest capacity network in the United States, lower prices, create jobs and improve service in rural areas, said John Legere, the current chief executive of T-Mobile and the new head of the proposed combined company.

T-Mobile and Sprint said they expected to complete their deal no later than the first half of 2019, an ambitious goal given the intense U.S. regulatory scrutiny it will be subjected to. T-Mobile will not be liable to pay Sprint a breakup fee should regulators block the deal, according to sources who asked not to be identified because that detail in their contract has not yet been made public.

The companies said they expect U.S. regulators would see the benefits of the deal.

“This isn’t a case of going from four to three wireless companies – there are now at least seven or eight big competitors in this converging market,” Legere said in a statement. Other companies also would be forced to accelerate their investments in the face of a combined T-Mobile-Sprint, the companies added.

A spokeswoman for Federal Communications Commission Chairman Ajit Pai declined to comment on Sunday on the proposed merger. The FCC will decide whether to grant the deal regulatory approval and if deal is in the “public interest.”

Deal Breakthrough

The breakthrough in the companies’ negotiations, first reported by Reuters on Thursday, came after T-Mobile majority-owner Deutsche Telekom AG and Japan’s SoftBank Group Corp, which controls Sprint, agreed on a structure that will allow Deutsche Telekom to continue to consolidate the combined company, which will have a market value of over $80 billion, on its books.

Deutsche Telekom will own 42 percent of the combined company, and will control the board of the combined company, nominating nine of the 14 directors. Legere will also serve as a director.

The implied equity valuation for Sprint is $6.62 per share based on T-Mobile’s closing share price on Friday. Sprint shares closed Friday at $6.50.

The all-stock transaction is 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 US share.

Sprint’s and T-Mobile’s first round of merger talks ended unsuccessfully in 2014 after U.S. President Barack Obama’s administration expressed antitrust concerns about the deal.

Under U.S. President Donald Trump’s administration, regulators have continued to fret about consumer prices. The U.S. government has opened a probe into alleged coordination by AT&T, Verizon Communications and a telecommunications standards organization to hinder consumers from easily switching wireless carriers, a person briefed on the matter said earlier this month.

The second round of talks between Sprint and T-Mobile ended in November over valuation disagreements, although Deutsche Telekom CEO Tim Hoettges, left the door open at the time, saying: “You always meet twice in life.”

Since then, Sprint’s shares lost about a fifth of their value amid questions about how the company can compete effectively under the weight of its long-term debt of more than $32 billion.

Softbank has been looking to trim its own debt as well, which reached 15.8 trillion yen ($147 billion) as of the end of December. It has said it is planning to raise cash by taking its Japanese mobile phone unit public this year.

Failure to clinch a deal last November left SoftBank CEO Masayoshi Son, a dealmaker who raised close to $100 billion for his Vision Fund to invest in technology companies, in search of other options for Sprint.

Investing in 5G technology

Even though Sprint’s customer base has expanded under CEO Marcelo Claure, growth has been driven by discounting. Analysts say that, without T-Mobile, Sprint lacks the scale needed to invest in its network and to compete in a saturated market.

T-Mobile has fared better than Sprint, even if it remains a distant third to Verizon and AT&T. It has managed to score sustained market share gains, as innovative offerings, improving network performance and good customer service attract new customers, according to Moody’s Investors Service Inc.

T-Mobile became the first major U.S. carrier to eliminate two-year contracts, a shift quickly embraced by consumers and copied by competitors. The company has also badgered rivals with its unlimited data plans.

Both Sprint and T-Mobile are far behind Verizon and AT&T in upgrading their network to accommodate next generation 5G wireless technology. Even after their merger, the combined company’s budget to invest in 5G will be smaller than Verizon or AT&T’s.

However, Sprint and T-Mobile hope the deal will give them more firepower to participate in auction for spectrum to develop 5G. They plan to participate in a spectrum auction in late fall.