|[June 10, 2014]
Fitch: Sprint/T-Mobile USA: Bigger is Only Better with Execution
NEW YORK --(Business Wire)--
A key factor in determining the long-term success of a potential Sprint
Corp./T-Mobile USA merger will be the combined company's ability to
produce a wireless network on par with the industry leaders in terms of
coverage, density and overall network quality, according to Fitch
Sprint Corp. and T-Mobile USA are reportedly nearing a transaction in
which Sprint will acquire T-Mobile for approximately $32 billion. The
combined companies would be of comparable size to Verizon and AT&T (News - Alert) from
a subscriber point of view, thus providing the necessary scale for
improved operational efficiency and profitability to better sustain
competition over the long term.
A Sprint/T-Mobile union would improve the network densification required
for a higher-speed wireless offering, but would also likely add further
integration challenges to Sprint's already lengthy network migration
plans, Fitch believes. Sprint's poor operational performance in the
past, combined with a lack of capital investment and aging
infrastructure, resulted in a growing competitive disadvantage as
network quality and speed lagged the industry, particularly as Verizon (News - Alert)
and AT&T accelerated deployment of 4G services.
Recent network initiatives to improve Sprint's competitive position and
4G service levels has been slow and resulted in elevated churn levels
due to the significant network disturbances related to the modernization
project. Further capital investments to leverage Sprint's high band 2.5
GHz spectrum advantage will require at least another couple of years as
Sprint attempts to improve its national service offering to the level of
Additional challenges persist. A combination of the two companies would
require a regulatory review process with strong potential for
litigation, as well as an extensive integration period. T-Mobile carved
out a compelling niche in the marketplace during the past year with its
"un-carrier" strategy that has resonated with consumers and would be the
stronger brand to leverage going forward. Sprint Chairman Masayoshi Son
envisions a combined company that could eventually go head-to-head for
wired home broadband services, although given the magnitude of such a
plan, timing is uncertain. As such, Fitch believes that under parent
company Softbank's (News - Alert) direction, the combined entity would need to
substantially improve the execution of future strategic initiatives to
compete more effectively against Verizon and AT&T.
Regulatory approval remains a substantial hurdle for this potential
transaction. The FCC (News - Alert) and DOJ have made explicit comments regarding their
desire to maintin a wireless marketplace with four operators as fewer
competitors could result in increased risk of higher prices and
decreased innovation. Thus any transaction would be judged on the merits
of whether the public's best interests are served and if material
antitrust elements are present.
Sprint's chairman has argued that the combination would be an effective
counterweight against the growing size of Verizon, AT&T and Comcast that
has been bolstered through continued consolidation. Both AT&T and
Comcast are attempting to amass more scale with $40+ billion merger
reviews before the FCC and DOJ. A combination of Sprint and T-Mobile
would result in a direct competitive overlap in a concentrated wireless
market. However, it may be unsustainable for the third and fourth
wireless operators to remain independent over the longer term as the
bulk of the wireless industry revenues and cash flows are concentrated
between two much larger players.
Predicting an outcome of a regulatory review for a potential Sprint and
T-Mobile combination is difficult given the current regulatory climate.
However, regulatory approval of a Sprint/T-Mobile merger would likely
require substantial concessions and related divestitures to address
public interest concerns and antitrust issues. These could include
material 2.5 GHz spectrum divestitures, a substantial commitment to
meaningfully participate in the broadcast TV auction, attractive 4G
wholesale service commitments, further obligations to support rural
partnerships and timeline/milestone dates associated with market
deployments targeting home wireless broadband service.
The impact of a potential T-Mobile acquisition on Sprint's pro forma
credit profile depends on numerous factors, including but not limited to
the overall transaction funding strategy, incremental investment in
Sprint by Softbank and anticipated cost synergies. Fitch's working case
assumes an equity purchase price of $40 per share for a transaction
value of approximately $32.1 billion. Fitch assumes the transaction is
funded with a mix of Sprint common stock (50% of transaction value), no
incremental investment by Softbank and approximately $16.1 billion of
incremental debt issued by Sprint. In this case Fitch estimates that
Softbank's pro forma ownership of Sprint would dilute to approximately
57% from 81%. Additionally a modest $2 billion in annual cost synergies
is assumed in the base case.
Fitch expects Sprint, as it exists today, to leverage cost reduction
efforts that will lead to margin expansion and a stronger overall
financial profile. Leverage peaked at 6.1x during 2013 and Fitch
anticipates leverage will decline to the low 5x range by year-end 2014.
In Fitch's view a potential T-Mobile acquisition could likely delay the
anticipated recovery of Sprint's credit profile.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ InfoTech Spotlight's Homepage ]