Changes in Wireless and the Implications for T-Mobile

23. Oktober 2012: Newspapers have been abuzz over changes in the wireless industry. It began in late September with T-Mobile selling its towers to Crown Castle. Then, it was Deutsche Telekom offering to buy MetroPCS to combine with T-Mobile. Then, it involved rumors that Sprint might upstage DT and offer a higher price for MetroPCS. Now it is Softbank buying 70% of Sprint.

What are the implications for T-Mobile and its workers? Bear with us: it takes a while to explain the changes in the industry. If you are impatient, scroll down to the last half of this article for the implications.

As we posted almost two weeks ago, the T-Mobile/MetroPCS hook-up works in the following manner. MetroPCS declares a 1 for 2 reverse stock split and makes cash payment of $1.5 billion to shareholders ($4.09 +/- per share) prior to the reverse stock split. MetroPCS then acquires all of T-Mobile’s capital stock by issuing Deutsche Telekom 74% of MetroPCS’ common stock on a pro forma basis. Afterwards, MetroPCS shareholders will own 26% and DT 74% of the new company (we will call it NewCo for the time being).

The combination will have the following effects:

  1. NewCo will have an enlarged customer base – 9.3 million MetroPCS customers will be added to the 33.2 million T-Mobile customers for a total of 42.5 million.
  2. NewCo will have expanded spectrum to launch its 4G network.
  3. NewCo will have a large focus on prepaid customers since all MetroPCS customers are prepaid.
  4. NewCo will be a public company. This is not a change for the MetroPCS shareholders but it does change Deutsche Telekom’s involvement in its U.S. assets. This will make it easier for NewCo to raise capital. It could also make it easier for DT to reduce its U.S. stake.

The name of NewCo has not been announced. It is expected that it will revert to T-Mobile USA but DT could surprise as it did in the United Kingdom with “Everything Everywhere,” the name of the company created after the merger of T-Mobile UK with France Télécom assets.

MetroPCS shareholders will vote on the deal in either 4Q 2012 or 1Q 2013. The deal is expected to close before June 30, 2013. Interestingly, the breakup fee for MetroPCS shareholders is relatively small ($150 million). Thus, management or shareholders can think of entertaining rival offers.

That is precisely where the rumors of Sprint buying MetroPCS came to play. The T-Mobile-MetroPCS deal seemed to have left Sprint with an uncertain future – neither as large as the giants AT&T Mobility or Verizon Wireless nor as focused on prepaid as the T-Mobile-MetroPCS.

Instead, Sprint negotiated with Softbank for a major capital injection. Softbank will buy $8 billion of newly issued shares directly from Sprint and will purchase an additional $12.1 billion from current Sprint shareholders. This $20.1 billion will give Softbank a 70% stake in Sprint. It is the largest single direct investment by the Japanese in the U.S. market.

Softbank says that, combined with its Japanese mobile operation, the combined entity will be #3 globally based on January-June 2012 revenues (China Mobile is #1, Verizon Wireless #2, AT&T Mobility #4, Vodafone #5, NTT DoCoMo #6, and Deutsche Telekom #7).

The entry of Softbank into the U.S. market will enable it to take advantage of its expertise in smartphones and 4G networks to compete with AT&T and Verizon. The $8 billion capital injection will enable Sprint to build out its 4G network and to strengthen its balance sheet. The $12.1 billion purchase of shares does not add to Sprint resources.

Softbank and Sprint hope the deal will get shareholder and regulatory approval by June 30, 2013. Most analysts expect the same FCC that derailed the AT&T-T-Mobile merger in 2011 to approve Softbank’s acquisition of Sprint (under the theory that it preserves four national wireless carriers). Still, AT&T could press the fact that a second national wireless carrier (after T-Mobile/Deutsche Telekom) would be controlled by a foreign interest, while the third carrier Verizon Wireless has a very large 45% stake by UK-based Vodafone, leaving AT&T alone as a U.S.-owned carrier.

Interestingly, the finances of the deal enable Softbank to funnel capital to Sprint before approval. Softbank will loan Sprint $3.1 billion in the form of bonds convertible into 16.4% of Sprint shares at $5.25 a share – even if the deal does not go through. (Click here for an explanation of the convoluted way Softbank is structuring the deal.) And the purchase would be on the cheap since Sprint shares were trading at $5.75. Interestingly, Softbank was trading lower on the news of the merger: investors appear to be nervous about Softbank assuming Sprint debt.

The fact that Sprint remains a public company gives Softbank the same flexibility that DT acquired with MetroPCS – ability to raise more capital and a pathway to exit.

Reuters has reported that the $3.1 billion immediate capital injection means that Sprint could be a bidder for MetroPCS. Other analysts are expecting Sprint to use those funds to purchase the remainder of Clearwire Corp, which operates a wireless network. Sprint already owns 52% of Clearwire and is the controlling investor. Click here for the analysis by the Wall Street Journal.

What are the implications of all these industry changes for T-Mobile USA?

  • First, its deal with MetroPCS should not be considered final. Softbank-Sprint may make an offer for MetroPCS. Later it may make an offer for T-Mobile itself.
  • Second, there is a race to next generation 4G networks that will dominate the industry and consume investment in the four national carriers, including T-Mobile.
  • Third, the Softbank-Sprint deal leaves T-Mobile-MetroPCS even further behind as the number four carrier, especially in its ability to make necessary capital expenditures.
  • Fourth, the capital injection into Sprint could allow it to fight for both prepaid and postpaid customers. Therefore, NewCo’s lock on the prepaid market is less certain.
  • Fifth, Softbank-Sprint remains significantly larger than T-Mobile-MetroPCS. The latter will be vulnerable to market pressure, economic forces, and potential suitors.
  • Sixth, T-Mobile-MetroPCS will be a public company, forced to show quarterly strength to impatient Wall Street investors who have very short memories.

What are the implications for T-Mobile workers?

  • First, there will be uncertainty in the upcoming months as to whether the MetroPCS deal will be finalized.
  • Second, the development of 4G technology means the sale of a variety of different devices to take advantage of network speed. This is a plus.
  • Third, the emphasis on the prepaid customer will put downward pressures on costs, including labor costs.
  • Fourth, T-Mobile has a choice to make. It could follow the low road and adopt MetroPCS’s hollowed-out strategy of providing services without actually having many employees – providing lousy customer service but employee costs borne by outsourcers. Or it could follow a road that provides better customer service by investing in its U.S. employees to provide good services in the combined company. As Deutsche Telekom knows, the high road is consistent with high margins and healthy profits.

The future is very uncertain for T-Mobile USA. CWA, ver.di, and TU will work with management to build a strong company that provides good jobs and honors the rights of T-Mobile workers. T-Mobile employees are well positioned to help the company use the merger to improve the customer experience and re-build for future growth.