The idea of T-Mobile US Inc. (NASDAQ:TMUS) buying Sprint Corp (NYSE:S) is one of the worst kept secrets on Wall Street. The rumors started even before Softbank Group Corp (OTCMKTS:SFTBF) acquired most of Sprint in 2013, although back then the assumption was Sprint would be the buyer, not the seller. Resistance from Obama regulators killed that deal by 2014.
But T-Mobile CEO John Legere, who joined the company in 2012, has proven to be a superb marketer. TMUS stock is up 177% since Sprint came to the stock market under Softbank in 2013, while S stock is up just 32%.
Most of that gain came after Softbank bought ARM Holdings last September, and the idea of T-Mobile buying Sprint was revived.
Since then, the rumors have done nothing but heat up.
Why does this deal make such sense?
The Real Reason for the TMUS and S Deal
Everyone knows the financial reasons for the deal. Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) each hold one-third of the U.S. mobile market. Sprint and T-Mobile share the other third. Combining S stock and TMUS turns the market from a duopoly with two weak sisters into a more competitive three-way race.
Many traders also know the physics of why a deal might happen. Softbank CEO Masayoshi Son has shifted from a focus on building a single global wireless play to building a $100 billion acquisition war chest through Fortress Investment Group LLC, which Softbank bought for $3.3 billion in February.
But there’s another reason, a more technical one, driving the deal.
Sprint owns a lot of very high-frequency spectrum, which it wants to use through a new network of tiny cell towers, built on existing telephone poles. The new design would let it deliver a lot more coverage in dense urban areas, at low cost.
While S was making its technical moves, TMUS was preparing bids that would deliver an $8 billion win for low-frequency spectrum being abandoned by TV stations. Most of its wins were in under-served rural areas that have never had service before. It did not bid high in the big urban markets like Houston, Atlanta, New York and San Francisco, where Sprint’s high-frequency, high-density plans are being implemented.
Combine T-Mobile’s low-frequency TV spectrum with Sprint’s high-frequency high-density play and you get a single carrier that can cover literally everyone, with plenty of capacity to serve their needs for years to come.
John Legere can sell that.