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T-Mobile-Sprint merger could lead to more IoT innovation

Steve Rogerson
May 3, 2018



The proposed merger of T-Mobile and Sprint could speed up the roll out of 5G technologies in the USA. The companies hope this will lead to more innovation in IoT, virtual reality and mobility services.
 
T-Mobile US and Sprint announced this week that they would merge in an all-stock transaction. The two American companies, as well as their respective majority shareholders Deutsche Telekom (62 per cent of T-Mobile US) and Softbank (83 per cent of Sprint) have agreed to the merger. The enterprise value of the new company is around $150bn with expected synergies with a net present value of some $43bn.
 
Deutsche Telekom should benefit both from the US business with its opportunities for growth and from its strong business in Europe, which is characterised foremost by the bundling of fixed network and mobile communications.
 
"This is an exceptional deal, which will strengthen Deutsche Telekom's presence in the leading markets in the western world," said Timotheus Höttges, CEO of Deutsche Telekom. "No other company in the industry is represented as strongly in both the USA and Europe as we are. Ninety per cent of our revenue comes from countries with particularly strong economic conditions. Deutsche Telekom benefits from growth on both sides of the Atlantic."
 
The larger T-Mobile US will have around 127 million branded customers and revenue of some $76bn, based on expected figures for 2018. This will position the company on a level with the two national competitors, AT&T and Verizon, in future. These two companies generate a disproportionately high share of total earnings and free cash flow among all the mobile communications companies in the USA.
 
"This is a consistent continuation of our strategy for the successful further development of our US business,” said Höttges. “First we restructured, then invested and expanded through the merger with Metro PCS and targeted spectrum acquisitions. Now we want to take on a leading role in the market."
 
T-Mobile US plans to step up and pursue its customer-focused un-carrier strategy of recent years, leveraging the increased clout of the combined company. On the one hand, this will allow its customers to benefit from lower prices. On the other, the larger T-Mobile, with its greater financial wherewithal and spectrum resources, will be able to roll out 5G technology more quickly and better than either T-Mobile US or Sprint would have been able to do alone.
 
To do this, the intention is to focus on convergence products combining fixed and mobile communication offerings, a portfolio with which Deutsche Telekom is already very successful in Europe.
 
"Together with Sprint, the new T-Mobile US will be the most powerful mobile communications company in the USA," said Höttges. "Even more customers will benefit from the best value for money and the fastest LTE network in the USA in the future. Speeding up the build-out of 5G technology will benefit American economic growth, and also creates value for T-Mobile US shareholders. It's a win-win situation for all Americans, for T-Mobile US customers, employees and shareholders, and for Deutsche Telekom."
 
The agreement between the four companies states that T-Mobile US will take over all Sprint shares in a stock swap. For every 9.75 Sprint shares, the company's shareholders will receive one new share in T-Mobile US. The number of T-Mobile shares issued will therefore increase from around 865 million to around 1.29 billion shares based on fully diluted shares. There are no plans for an additional cash contribution. This means the transaction is designed in such a way that there is no cash outflow for any of the companies involved.
 
Deutsche Telekom holds 62 per cent of the shares in T-Mobile US. Softbank's shareholding in Sprint accounts for around 83 per cent of the company's equity. The remaining shares in both of the American companies are in free float. On completion of the transaction, Deutsche Telekom will hold around 42 per cent of T-Mobile shares. Softbank will have a 27 per cent stake. The remaining approximately 31 per cent of shares in T-Mobile US will be in free float. 
 
In addition to this, Softbank and Deutsche Telekom will sign a voting rights agreement. This will provide Deutsche Telekom with majority rights in determining the voting decisions of the T-Mobile US shares held by Softbank. This gives Deutsche Telekom direct and indirect access to voting rights for a total of 69 per cent of T-Mobile shares.
 
According to the agreement, Deutsche Telekom will be able to appoint nine of the 14 members of the board of directors, of whom a minimum of two must be independent, group-external representatives.
 
The company, which will be considerably larger when the transaction is completed, is to be headed by John Legere, who will also be a member of the board of directors. He already heads T-Mobile US in the position of chief executive officer. Höttges is set to be appointed chairman of the board of the larger company.
 
This division of the shares in T-Mobile US and the regulation regarding company management mean that Deutsche Telekom will also be able to consolidate T-Mobile US in the future.
 
The high synergies with a present value of around $43bn (net of around $15bn cost to achieve) are to result from savings in operating costs for the larger company, as well as in investments (capex). This means these savings can be realised largely independently of market developments. Sales synergies are not included.
 
The aim is to integrate the mobile communications networks of T-Mobile US and Sprint, resulting in the operation of a single network while simultaneously increasing the customer base. This should allow savings in network build-out and the build-out of a nationwide 5G network, as well as savings in sales and marketing costs, store fittings, advertising, customer support, repairs and logistics. There should also be increased efficiency in internal IT systems and billing.
 
Savings from cost and investment synergies are expected to outweigh integration costs just three years after the agreement comes into force. Integration costs will amount to an estimated $15bn.
 
In coming years, the annual positive contribution from opex and capex synergies is expected to reach more than $6bn in 2024, resulting from successive increases. For calculative purposes, this is based on the assumption that the transaction can become effective at the end of 2018. T-Mobile US and Sprint expect the closing of the transaction in the first half of 2019.
 
The larger T-Mobile US intends to use the merger as an opportunity to improve performance above all in rural areas. T-Mobile US is already building out the 4G LTE network on a huge scale in rural areas based on the mobile frequencies acquired last year in the 600MHz range. By doing this, the company is expanding into regions with additional customer potential of around 60 million inhabitants.
 
The overall plan is for the larger company to employ more staff than the two previous companies put together. Additional call centre capacity in rural areas will contribute to this, as will network build-out and rollout with the associated demand for staff, including for long-term maintenance. Numerous new stores are also to be opened in these areas.
 
Customers should benefit from faster 5G build-out in the future. To achieve this, the larger T-Mobile will be able to access a significantly improved spectrum position and to use the necessary frequencies in the lower, mid and millimetre wave frequency ranges held by both companies. Taken with the stronger financial resources, this results in a decisive improvement in opportunities for 5G build-out.
 
For the customer, this means higher transmission rates, higher transmission capacities and faster network response times in the future. The 5G technology also promises more innovation based on state-of-the-art network technology, for example in IoT, virtual reality and mobility services.
 
The nationwide introduction of 5G technology will, according to consultancy firm Accenture, create around three million new jobs in the USA, coupled with an increase in investment of some $275bn. A larger T-Mobile US can speed up this growth impetus for the US economy, which Accenture estimates to be around $500bn. This means that the merger creates additional potential for value creation for T-Mobile US shareholders.
 
The transaction will not affect Deutsche Telekom's forecast for the development of the group in the 2018 financial year. Deutsche Telekom is sticking to its expansion plans for its fibre optic and 5G networks in Germany. Planning remains for adjusted EBITDA of around €23.2bn and free cash flow before dividends and investment in spectrum of around €6.2bn.
 
The structuring as a stock-for-stock transaction and the strengthening of the self-financing of the new T-Mobile US mean the transaction will not affect the group's investments in its other operating segments.
 
Deutsche Telekom's statement on dividend policy for the 2018 financial year is also unchanged. The dividend proposed to the shareholders' meeting later this month for the 2017 financial year will be €0.65 per share. The implementation of this shareholder remuneration policy is dependent on the relevant resolution by the shareholders' meeting and on fulfilment of other legal requirements. 
 
Based on current planning, the transaction is expected to have a positive effect on the earnings per share of Deutsche Telekom after three years.
 
The agreement is subject to approval by the antitrust and regulatory authorities including the US Department of Justice, the FCC and the security authorities, by T-Mobile US and Sprint shareholders, and to other customary closing conditions.
 
Morgan Stanley advised Deutsche Telekom, Goldman Sachs and Wachtell, Lipton. Rosen & Latz advised Deutsche Telekom and T-Mobile US on this transaction.