By Ryan Knutson
Sprint Corp. and T-Mobile US Inc. have agreed on the broad
outlines of a merger valuing T-Mobile at around $32 billion, as
recent regulatory developments convinced executives at both
telecommunications companies that they have an opening to get a
deal approved, according to people familiar with the matter.
The terms involve Sprint paying around $40 a share for T-Mobile
in an acquisition that could happen early this summer, the people
said. The companies are still working toward a formal contract, and
the effort could fall through. But if completed, the merger would
combine the country's third- and fourth-largest wireless operators,
creating a bigger competitor to market leaders Verizon
Communications Inc. and AT&T Inc. while leaving consumers with
fewer choices for service.
A deal between Sprint and T-Mobile would extend a wave of
consolidation that is uniting some of the biggest companies in the
telecom and media industries, and is expected to face strong
opposition from regulators and a lengthy antitrust review.
A deal would need the approval of the Federal Communications
Commission and the Justice Department. Sprint will be making a big
bet that it can win. Under the terms discussed, Sprint would pay
T-Mobile more than $1 billion in cash and other assets if deal is
rejected, the people said.
The gamble is a risky one for Sprint, which is already heavily
indebted and has posted losses for the past seven years. But
executives believe recent developments at the FCC--including a
contentious debate over so-called net neutrality and new
spectrum-auction rules that aren't as friendly to smaller carriers
like Sprint and T-Mobile--have created an opening to move
quickly.
Both companies feel doing a deal now is critical for their
long-term survival, people familiar with the matter have said.
AT&T and Verizon control most of the industry's valuable
wireless customers and profits. And while T-Mobile has had a good
competitive run in the past year, reversing subscriber losses and
taking customers from rivals, executives at both companies have
said the best way to create meaningful competition over the long
term would be to join forces.
Sprint Chairman Masayoshi Son has been driving the merger,
pledging to be a fierce competitor. The sides began working toward
a deal with a renewed sense of urgency last month after the FCC
voted to approve rules for a key auction of airwaves currently held
by broadcasters, expected to take place in 2015. The companies both
felt revisions the agency made to the auction rules would help
their case for a merger, according to several people familiar with
the matter.
The FCC had originally considered barring AT&T and Verizon
from bidding on a large swath of airwaves that would have been set
aside for smaller carriers. But after intense lobbying, the
commission decided to reduce the amount that would be set aside.
Sprint and T-Mobile believe that decision gives them an opening to
argue the government needs to allow a merger because it isn't doing
enough to help them compete, the people said.
The FCC has said it will reconsider the set-asides in the event
a merger of any of the top four carriers is proposed.
The companies are also encouraged after one Democratic
commissioner at the FCC, Jessica Rosenworcel, indicated in private
meetings with people on Wall Street she would keep an open mind
when considering a transaction. Two Republican commissioners are
considered more likely to favor the deal, and FCC Chairman Tom
Wheeler and Commissioner Mignon Clyburn, both Democrats, more
likely to oppose.
The FCC declined to comment.
The timing of the possible deal comes as regulators are also
weighing cable giant Comcast Corp.'s $45 billion deal to buy Time
Warner Cable, agreed to in February, and AT&T's $49 billion
deal last month for satellite broadcaster DirecTV. The deals would
reshape the communications business, and former regulators say the
government will have to take their combined effects into
account.
Antitrust authorities signed off on one wireless deal after
another in the past decade before shooting down AT&T's $39
billion deal to buy T-Mobile in 2011. The Justice Department argued
the U.S. market needed four national carriers to be competitive and
lauded T-Mobile as a maverick that helped keep the larger carriers'
prices in check.
Regulators have expressed satisfaction with the results of that
decision and have made clear their discomfort with further deals.
T-Mobile has mounted an aggressive battle to win customers by doing
away with lucrative wireless-industry standbys like two-year
contracts and international data charges, and added more than 2
million so-called postpaid customers in 2013 after shedding
subscribers for years.
Sprint is likely to argue those gains are illusory and will
eventually fade if Verizon and AT&T remain so much bigger than
their rivals, people familiar with the matter have said. Sprint's
argument would be that a deal takes the country from two real
competitors to three, not to three from four, the people said.
A deal, however, would complete the hollowing out of the U.S.
wireless industry's midsection. In particular, recent deals have
removed big sellers of cheaper prepaid wireless service, a market
where Sprint and T-Mobile are now the main competitors.
Sprint and T-Mobile are also considering forming a joint venture
to bid together in upcoming auctions of wireless airwaves, the
people familiar with the matter said.
Under the broad terms the deal would be roughly 50% cash and 50%
stock, the people said. T-Mobile's largest shareholder, Germany's
Deutsche Telekom AG, would retain a stake of 15% to 20% in the new
company, the people said. Based on roughly $40 a share and
T-Mobile's outstanding share count at the end of the first quarter,
a deal would value the company at around $32 billion.
Dana Mattioli contributed to this article.
Write to Ryan Knutson at ryan.knutson@wsj.com
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