Sprint and T-Mobile near a deal
Sprint Corp. (S) is nearing an agreement on the price, capital structure and termination fee of an acquisition for T-Mobile US Inc. (TMUS) that could value the wireless carrier at almost $40 a share, people with knowledge of the matter said.
Sprint will offer about 50 percent stock and 50 percent cash for T-Mobile, leaving Bonn-based parent Deutsche Telekom AG with about a 15 percent stake in the combined company, according to the people, who asked not to be identified because the process is private. The agreement could be announced as soon as July, the people said. At just under $40 a share, T-Mobile’s equity value would be about $31 billion.
A deal would bring together the third- and fourth-largest U.S. wireless carriers to create a more formidable competitor to leaders AT&T Inc. and Verizon Communications Inc. Billionaire Masayoshi Son, the founder of Japan-based SoftBank Corp. (9984), which owns 80 percent of Sprint, has been pitching the deal to skeptical regulators as beneficial to consumers in both wireless and Internet service.
“In order to compete against the big two, AT&T and Verizon, scale is essential,” said Satoru Kikuchi, an analyst at SMBC Nikko Securities Inc. in Tokyo. “The mobile-phone industry is an industry that needs business investment, so the larger the better.”
Deutsche Telekom, which owns about 67 percent of T-Mobile, was seeking at least $40 a share, two of the people said. SoftBank is willing to pay in the upper $30s, and the two sides have bridged the gap, the people said. The companies haven’t set an announcement date, and there’s still a lot of work to be done before a deal is completed, including deciding management of the new entity, the people said.
Bulking Up
Deutsche Telekom gained 0.5 percent to 12.47 euros at 9:17 a.m. in Frankfurt. T-Mobile rose as much as 6.5 percent to $36.50 in after hours trading in New York, while Sprint gained as much as 4.8 percent. SoftBank shares rose 0.3 percent to 7,817 yen at the close in Tokyo, paring this year’s decline to 15 percent.
“Even if we take into account the operational recovery that T-Mobile’s new management implemented, this is a good price for Deutsche Telekom,” said Alexandre Iatrides, an analyst at Oddo & Cie. in Paris. “In the long run they don’t have the size to compete as a standalone company. The amount of capex they’d need to maintain the same quality as AT&T and Verizon would be way too high.”
Iatrides said a deal would only have a 30 percent to 40 percent chance of winning regulatory approval.
Industry Consolidation
Softbank’s Son declined to comment at an unrelated press conference in Japan today. Bill White, a spokesman for Sprint, declined to comment, as did Andreas Fuchs, a spokesman for Deutsche Telekom. Anne Marshall, a spokeswoman for T-Mobile, didn’t respond to a message seeking comment.
Son is seeking to bulk up Sprint as consolidation increases across the communications industry. Verizon closed a deal earlier this year to buy out Vodafone Group Plc’s stake in their wireless venture for $130 billion. Comcast Corp. and Time Warner Cable Inc. have announced a merger, and AT&T plans to acquire satellite-TV operator DirecTV for $48.5 billion.
Enterprise Value
In addition to the equity value, T-Mobile has about $14.5 billion of debt and $5.5 billion of cash, giving the company a theoretical enterprise value of about $40 billion. That’s about 8.6 times T-Mobile’s trailing 12-month earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. SoftBank paid 9.7 times Ebitda for Sprint, the data show.
Additional work that remains to be done includes developing a model that forecasts Sprint and T-Mobile’s futures independently and together, two of the people said. The projections are key to convincing regulators that allowing a merger is in consumers’ best interests. AT&T’s deal for DirecTV has given Son more confidence that he can make a strong case, two of the people said.
The sides are nearing an agreement on a reverse termination fee, two of the people said. Son wants to pay about $1 billion, while Deutsche Telekom has pushed for closer to $3 billion, people familiar with the matter said earlier.
The value of the transaction would reach the level of Deutsche Telekom’s failed attempt in 2011 to sell T-Mobile to AT&T when bond holdings and debt disposals as well as the breakup fee from that earlier deal are considered, said Stefan Borscheid, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart.
Bloomberg News previously reported a deal would probably be announced in June or July. It’s possible a deal announcement could slip into August, one of the people said. If no deal is reached by then, the sides are likely to stop negotiations for several years and wait for a new U.S. presidential administration, the person said.
Source: bloomberg
