Article from NYTimes.
By clinching a deal to buy MetroPCS, T-Mobile USA is aiming not only to survive but also to turn up the pressure on its larger rival, Sprint Nextel.
The merger, formally announced on Wednesday, signals a renewed phase of jockeying among cellphone service providers as they race to draw in more smartphone users and upgrade to the latest high-speed data networks. And by taking one of the most attractive takeover targets, MetroPCS, off the table, T-Mobile may have strengthened its hand at the expense of Sprint.
The cellphone service industry is dominated by the virtual duopoly of Verizon Wireless and AT&T, which together claim 199 million customers, more than their next six competitors combined. That has left Sprint and T-Mobile to scramble, trying to undercut their big rivals on price even as they seek additional wireless spectrum that would support high-speed data networks.
The industry has long looked to consolidation to grow; last year, AT&T unsuccessfully sought to buy T-Mobile for $39 billion, hoping to gain size and spectrum. Growth via merger also underpinned Sprint’s aborted attempt to buy MetroPCS this year, a transaction scrapped at the 11th hour by Sprint’s reluctant board.
MetroPCS represents a potentially big lost opportunity for Sprint. The two companies use the same network technology (CDMA), which would have made for a relatively smooth integration of customers and devices. T-Mobile runs on GSM, so the company will have to convert MetroPCS’s 9.3 million customers to its technology over the next three years.
CLOSING THE GAP If the parent company of T-Mobile USA buys MetroPCS, the combined unit would have the fourth most cellular subscribers.
|
SUBSCRIBERS, IN
MILLIONS |
| Source: The companies |
| AT&T |
105 |
| Verizon |
94 |
| Sprint |
56.4 |
| Merged company |
42.5 |
| T-Mobile USA |
33.2 |
| MetroPCS |
9.3 |
The newly enlarged T-Mobile will have about 42.5 million customers, compared with Sprint’s 56 million. But the merger could potentially give T-Mobile additional clout to demand popular devices like the iPhone, which it does not now carry. Adding MetroPCS will also help T-Mobile build out more quickly its Long Term Evolution network, the speedy data standard that powers the latest batch of smartphones.
T-Mobile executives argue that the unified operator can offer unlimited data and cheaper prepaid service plans to more customers.
“When you look at this as an industry, we are the alternative choice for consumers,” John J. Legere, the company’s chief executive, said in a telephone interview. “This can only be good for the industry to think about the competition and consumer.”
T-Mobile’s parent, Deutsche Telekom, and MetroPCS held on-and-off discussions about a merger for years, according to people with direct knowledge of the matter who spoke anonymously because they were not authorized to speak publicly about private discussions. But after Sprint’s board vetoed a takeover of the smaller service provider, T-Mobile and MetroPCS met early this summer to begin formal discussions about a deal.
Weeks of negotiations ensued, leading to a structure in which Deutsche Telekom would own 74 percent of the combined entity through a complicated stock swap. Existing MetroPCS shareholders will also receive $1.5 billion through a special dividend, worth about $4.09 a share.
And while antitrust officials fiercely opposed AT&T’s takeover of T-Mobile, people involved in the MetroPCS transaction argued that Wednesday’s deal was more likely to pass regulatory muster. Instead of fortifying one of the country’s biggest service providers, it will bolster one of its weaker ones.
A spokesman for Sprint declined to comment.
With T-Mobile claiming MetroPCS, Sprint is likely to find itself even harder pressed to build out its next-generation network and pitch itself as the dominant low-cost service provider. Sprint’s chief executive, Daniel R. Hesse, has said he expects to participate in mergers within the industry, but few attractive takeover targets remain.
Shares in Leap Wireless International, a smaller competitor often cited as a likely deal partner, plummeted nearly 18 percent on Wednesday, as investors shook off hopes that it would be acquired anytime soon. The company, a prepaid service provider, operates largely in less-attractive markets and is in the midst of a turnaround effort.
“I don’t think that Leap would provide all that much,” Charles S. Golvin, an analyst at Forrester Research, said by telephone.
While some analysts have speculated about whether Sprint would try to outbid T-Mobile for MetroPCS, some industry deal makers were skeptical of the company’s will to revisit a target it had already left at the altar.
Sprint is still scarred by the merger that produced its current incarnation: its 2005 union with Nextel Communications, an example still used in business schools as a classic case of a bad deal.
The tie-up was marred by incompatible phone networks and infighting. As a result, Sprint slipped further behind Verizon and AT&T in market share.
Sprint may still pursue deals, especially as a way to add to its stores of spectrum, without resorting to full-on mergers. Analysts and deal specialists say one potential seller is Clearwire, which already helps provides a high-speed data network to Sprint.
Another is Dish Network, which has an abundance of spectrum but has been unable to set up its own mobile phone network. The company’s chairman, Charles W. Ergen, hinted at an industry conference that with T-Mobile out of the running as a potential partner, he would be open to others.
“Sometimes when one door closes, a window opens somewhere else,” he said, according to a report in The Denver Post.
Analysts have floated one more, bolder, possibility: buying the newly enlarged T-Mobile, creating a third major company to combat Verizon and AT&T. Industry bankers disagree on whether such a deal would be opposed by the Federal Communications Commission.
Read Full Post »
Blog of Intellectual Capital 