T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) had to give up quite a bit to gain merger approval from the Federal Communications Commission and the Department of Justice. The merger is still facing opposition from attorneys general from 17 states and Washington, D.C., who have filed suit against the deal.
That opposition comes despite T-Mobile and Sprint agreeing to sell the Boost Mobile brand and certain spectrum licenses to DISH Network (NASDAQ: DISH) to support a fourth competitor in the market. New T-Mobile, as management refers to the company resulting from the merger, will also support DISH's entry into the market with a wholesale mobile virtual network operator (MVNO) agreement for seven years.
"I would never bet against Charlie Ergen," T-Mobile CFO Braxton Carter said at a recent investors conference. Ergen is the co-founder and chairman of DISH who has led its push into wireless over the last decade. Nonetheless, T-Mobile's management is confident it can still achieve everything it set out to do if the merger goes through as is. Here are three reasons why.
Sprint CEO Marcelo Claure and T-Mobile CEO John Legere. Image source: T-Mobile.
1. Synergies are still intact
T-Mobile and Sprint touted $43 billion in synergies when the two companies announced their plans to merge way back in April 2018. "The vast majority of the synergies in this deal come from the network side," T-Mobile COO Mike Sievert said. "Twenty-six billion [dollars] of the 43 [billion dollars] comes from not burdening the American consumer to pay for the fully redundant cost of two networks that sit right beside each other."
Sievert said the company has actually been able to improve on that figure as time's gone on without being able to close the merger. As a result, it could realize even greater synergies from reducing the network overlap and deploying spectrum and other network assets more efficiently.
"The other third [in synergies] is really coming from back office. Duplicate advertising, duplicated G&A, et cetera," CFO Braxton Carter added. T-Mobile should be able to reduce the total overhead expenses involved with running two independent wireless services in relative short order.
2. Offsetting aspects of the DISH deal
Losing the Boost Mobile brand certainly stings a bit for T-Mobile. That said, it has its own relatively strong prepaid brand, Metro, that it may be able to grow more effectively with an improved focus on prepaid consumers. Meanwhile, Carter pointed out there are two offsetting factors in its deal with DISH.
"We're losing the revenue and the margin associated with the prepaid business, but we're replacing it with a wholesale arrangement. ... That is largely an offset," he said.
It's worth noting the MVNO agreement is only in place for seven years. In the meantime, DISH will be building out its wireless network and migrating customers to its own network, so the amount of high-margin revenue New T-Mobile will bring in from the MVNO agreement is tough to forecast. At the end of the seven years, that revenue will, in all likelihood, completely disappear. It's more of a short-term Band-Aid than a complete offset for giving up Boost Mobile.
Carter was also keen to point out that with the sale of Boost, the company's bridge commitment is reduced to $27 billion from $30 billion. Additionally, it'll see additional revenue come in after it migrates Sprint customers to its new network and frees up the 800 MHz band spectrum for sale to DISH.
3. The ability to get ahead of the competition in 5G
Most important for New T-Mobile's long-term prospects is its ability to build out a 5G wireless network that competes favorably against Verizon and AT&T. The merger provides all the ingredients necessary to put together the "layer cake" network CTO Neville Ray wants to build. "Our intention is that we move ahead of them incredibly quickly," he said.
He plans to do that by deploying Sprint's hoard of 2.5 GHz spectrum on top of T-Mobile's 600 MHz network that's already largely rolled out with 5G-capable technology. He's already secured the necessary permits and approvals to deploy that spectrum as soon as the deal closes.
Sievert believes that if T-Mobile leapfrogs AT&T and Verizon in network quality at the advent of 5G, it could result in a lot of new customers for the company. T-Mobile has grown in spite of consumers' perception that its network isn't quite on par with AT&T's or Verizon's, but it's good enough considering the value T-Mobile offers. If T-Mobile can consistently show a demonstrably better 5G network than its competitors as consumers are looking for how to best take advantage of the new technology 5G enables, it could lead to a lot of new customers for New T-Mobile.
A lot of work left to do
There's a lot that has to happen for T-Mobile and Sprint to fully capitalize on their merger. They have to remove redundancies in their general and administrative expenses. They have to deploy Sprint's 2.5 GHz spectrum to start building out its 5G network, which will also enable them to reduce redundancies in the two wireless networks. That will also free up Sprint's 800 MHz spectrum for sale to DISH, providing a nice cash infusion.
Most importantly right now, though, is T-Mobile needs to figure out how to appease the 18 attorneys general suing it -- or prepare for battle in court.
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