Does T-Mobile Need a Merger to Survive?
T-Mobile CEO John Legere makes a lot of noise, but his company does not make a lot of money.
In fact, despite posting what the company described as the biggest growth period in its history during the third quarter, comprised of adding over 10 million customers in the last six quarters, T-Mobile has struggled to turn a profit. That is largely because competing with industry leaders AT&T and Verizon requires huge infrastructure and spectrum investment.
This conundrum led Deutsche Telekom CEO Tim Hoettges, whose company owns about three-quarters of T-Mobile, to question whether the brand has a future if it can't ultimately merge with No. 3 wireless player Sprint . Hoettges also recently said he believes such a merger is impossible at the moment because the Federal Communications Commission is opposed to seeing the number of major carriers drop from four to three.
"I was intrigued by the idea of having a combination with Sprint and being the 'super-maverick' in the market," Hoettges told Re/code in an interview at the DLD Conference in Munich, Germany. "I hope that the political environment will change at one point in time."
The revenue problem
While T-Mobile put up record growth numbers in the third quarter, its revenue was less than impressive. On the plus side, total revenue for the quarter was $7.35 billion, up 2.3% from $7.185 billion in the preceding quarter and up 9.9% from $6.688 billion in the third quarter of 2013. Unfortunately, the company lost $0.12 a share for the period, compared to earnings of $0.48 per share in the second quarter of 2014 and a loss of $0.05 per share in the third quarter of 2013.
"The sequential decrease in earnings per share was primarily due to a non-cash gain of $731 million recognized in the second quarter of 2014 related to spectrum license transactions, the company stated in its earnings release .
The long-term profit problem that Hoettges spoke of comes partially from costs driven by spectrum and partially from infrastructure expenses.
In the third quarter, T-Mobile spent $1.13 billion on capital projects, up from $940 million in the second quarter of 2014 and $1.01 billion in the third quarter of 2013. The company said the increase was "primarily due to the timing of network spend in connection with T-Mobile's modernization program as well as commencing the rollout of 4G LTE on the 700 MHz A-Block and 1900 MHz PCS spectrum."
These types of expenses aren't going away, and Deutsche Telekom must keep investing to keep up with AT&T and Verizon, which can spread their investment out over much larger user bases.
Hoettges thinks T-Mobile CEO John Legere (pictured) is doing a good job. Source: T-Mobile
Get big or get gone?
Hoettges said believes it's "the concentration of wealth and spectrum by the two largest players that remains an obstacle to true competition," Re/Code reported. He said the problem is likely to worsen after the upcoming midband auction, in which he expects both AT&T and Verizon to make large bids.
That's why, although Deutsche Telekom has made the investments to improve infrastructure and gain customers, Hoettges acknowledged the current approach is not sustainable because it requires spending between $4 billion and $5 billion each year just to keep up.
"The question is always the economics in the long term ... and earning appropriate money," Hoettges said. "You have to earn your money back at one point in time."
He made clear the path to proft, or at least sustainability, would be a merger with Sprint, which would give the combined companies enough subscribers to take on the bigs boys.
Hoettges left little doubt that if his company does not see a way to make money at some point, it won't keep spending. That would shrink the field to three, with Sprint being much weaker than a combined T-Mobile/Sprint would be.
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Daniel Kline owns shares of Apple. He looks a little like a younger, heavier John Legere. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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