Shares of Sprint (S) and T-Mobile US (TMUS), which have been also-rans in the U.S. wireless market for as long as most people can remember, enjoyed spectacular 2013 returns as investors bet that the third- and fourth-largest players would combine forces to take on larger rivals Verizon (VZ) and AT&T (T).
Now all bets are off.
According to the Wall Street Journal, “antitrust authorities expressed their strong skepticism about such a deal during meetings with Sprint officials in recent weeks.” The Federal Communications Commission doesn’t appear to be keen on the idea, either.
That’s terrible news for investors — Sprint stock and TMUS, already appearing hung over in the new year, are headed nowhere fast over the long run.
Of course, investors shouldn’t just ignore (or sell) Sprint stock and T-Mobile. Short of their income qualities, AT&T and Verizon should be ignored too — the fundamentals of the U.S. wireless market are that poor. Wireless service prices are bound to fall as price competition intensifies, and all the meanwhile, carriers spent (and will continue to spend) billions on upgrading their networks.
Opposition to the latest wireless rumored wireless merger might have come as a surprise to Sprint’s CEO/pitchman Daniel Hesse and Masayoshi Son, the head of Japan’s SoftBank (SFTBF), which acquired a controlling interest in Sprint for $1.9 billion last year. For one thing, it’s hard to imagine the new company posing much of a competitive threat. A combined Sprint/T-Mobile would have 53 million users — significantly greater than their individual parts, but still less than half the 110 million served by AT&T and the 120 million subscribers under the Verizon flag.
The U.S. Justice Department also recently blessed a controversial tie-up between US Airways and American Airlines after initially opposing it after the new company, the world’s largest airline, agreed to divest dozens of airport landing slots.
Son, who is a billionaire, is in a pickle. He wants to gain scale in the U.S. quickly, and TMUS is the easiest way to do that. However, Sprint can’t join forces with a larger player because Hesse was instrumental in having the U.S. government block AT&T’s planned $39 billion acquisition of T-Mobile in 2011.
Since then, these one-time partners have become bitter enemies thanks to T-Mobile’s colorful CEO, John Legere, who needles AT&T every chance he gets. He recently gained legions of fans on Twitter (TWTR) after getting thrown out of an AT&T party at the Consumer Electronics Show.
As for smaller players, there doesn’t seem much point in doing that since you’re looking at low-single-digit millions of customers for any of the other players — too small to make much of a difference to SoftBank/Sprint’s bottom line.
Handicapping whether Son would prevail in a legal battle to save the Sprint-TMUS deal is a fool’s errand. One of the few things that most Wall Street pundits agree upon is that the application of antitrust laws is maddeningly inconsistent. As I noted earlier, deals that experts are sure will pass muster get blocked and vice versa. Son, though, certainly has the financial resources to square off against Uncle Sam.
Regulators have unofficially decided that there should be four national carriers, though the mature U.S. wireless market doesn’t seem like it can support all of them. Sprint has posted losses for the past four quarters. T-Mobile has bled red ink for two and is expected to lose 14 cents per share in the December period.
During the most recent quarter, Sprint at least improved its losses year-over-year to $1.04 billion, and the 69,000 customers it shed were far fewer than Wall Street’s expectations for a 371,000-customer exodus. Thanks to its innovative marketing including the “Un-carrier,” T-Mobile added more than 1.6 million customers in the fourth quarter, indicating that its gaining share from larger rivals. But there are some worrisome trends at TMUS. In the third quarter — the latest period for which this data is available — average revenue per user fell $1.40 t0 $52.20, which is well below the $64.07 Sprint reported in its latest quarter.
The U.S. wireless industry is becoming more price-sensitive by the millisecond. T-Mobile has recently upped the ante in the price wars by offering to pay customers’ early termination fees from other carriers. Sprint’s “Framily” plan provides unlimited talk and text along with 1 gigabytes of data on the the company’s network for groups of 10 people or more for as low as $25 a month. Interestingly, a recent survey by Cowen found that Sprint’s customers paid monthly bills of $144, the second most expensive in the industry. T-Mobile, for its part, was the cheapest at $120.
Over the next few months, the deals will keep coming from Sprint and T-Mobile, and perhaps AT&T, which recently announced price cuts for its wireless data plans after adding fewer wireless customers during Q4 than Wall Street expected. Verizon is on record saying it doesn’t plan on competing on price, but given all of its rivals are doing precisely that, it’s hard to imaging that this stance will last long.
The wireless customers are going to call the shots going forward, creating no end of headaches for the industry. Thus, without a deal, Sprint stock and TMUS are dead money.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.