Another Week, Another Wireless Deal
It is not every week that we focus on consolidation of ownership in the wireless industry. OK, you are right, frequent reader, it is almost every week. On October 15, Sprint Nextel announced that it had agreed to sell 70 percent of itself to SoftBank of Japan for $20.1 billion. SoftBank, a big Japanese telecommunications company, said it would pay $8 billion to buy newly issued Sprint stock worth about $5.25 a share. It will then pay $12.1 billion to buy existing stock from other investors at $7.30 a share, a premium to current levels. [See more on how the deal is structured.] The parties hope to close the deal – after gaining approval from regulators and Sprint shareholders – in the middle of 2013.
For Sprint, the deal provides some much-needed cash as it tries to compete with Verizon Wireless, which controls 32 percent of the market, and AT&T Mobility, which has a 30 percent market share. Sprint is the third-largest carrier with a 16 percent share. Sprint has been spending billions of dollars to build a next-generation data network to support the latest smartphones like the Apple iPhone 5, but remains well behind Verizon and AT&T in offering Long-Term Evolution, or LTE, data service. Sprint has nearly $21 billion in debt, some of which is set to mature next year. With the announcement came immediate speculation that Sprint could now seek additional merger and acquisition opportunities. Stifel Nicolaus analyst Christopher King pointed out that “the deal itself does not create much, if any, financial synergies . . . outside of lowering Sprint’s financing costs.”
Until now, SoftBank has been focused on gaining share in its home market, largely through acquisitions and building out an LTE high-speed data network. Softbank, which first became a mobile operator just six years ago, has doubled its subscriber base in Japan using aggressive pricing and creative contracts. Back in 2006, SoftBank purchased the struggling Japanese unit of Vodafone. Softbank immediately unleashed a barrage of advertising that included international superstars such as Brad Pitt and offbeat commercials featuring talking cats and aggressive contract plans that set off a price war. It was also the first of Japan's big three operators to embrace smartphones and made another successful gamble in agreeing to Apple's strict purchasing and profit-sharing requirements to become Japan's exclusive iPhone provider until last year. Since entering the mobile business in April of 2006, Softbank has more than doubled its subscriber base to 30 million, a period in which the Japan's overall number of subscribers has increased only 40 percent. Recently, SoftBank had been focused on reducing its enormous debt load, which stood at nearly $13 billion as of June 30. But Japan’s market is not growing as the US market is. Handset shipments tumbled 27 percent during the past five years in Japan.
If completed, the deal will create the world’s third-largest mobile phone operator by revenues. Softbank group will have 96 million users after the transaction. It will also give SoftBank chief executive Masayoshi Son influence over the future of the industry at a time when every big US operator is scrambling for spectrum. The strategy in the Sprint deal counts on smartphone users migrating to faster wireless networks to surf the Web and download videos and music. Softbank is looking to ride the fastest growth in mobile communications since 3G started rolling out a decade ago. LTE subscriptions quadrupled this year to 73 million and are expected to reach 1.2 billion by 2016, according to projections from IHS iSuppli. Some of the world’s largest handset makers -- Apple, Samsung Electronics Co. and HTC Corp. - - support the technology. By acquiring Sprint, Softbank is likely to make some economies of scale, as the iPhone is the core handset at both companies and both use Ericsson infrastructure.
The deal comes on the heels of Deutsche Telekom’s T-Mobile USA plans to buy MetroPCS, a move that would unite the fourth and fifth largest wireless companies in the US. And consolidation in the global telecoms industry is expected to accelerate, with the shift to advanced mobile data services increasing pressure on carriers to build scale in order to meet rising capital spending requirements.
More Consolidation Coming?
As the deal was announced, reports indicated that Sprint was trying to take control of Clearwire. Sprint had held a 48 percent share of Clearwire and an equal percentage of voting power. But on October 16, Bloomberg reported Sprint had no immediate plans to take over Clearwire.
GigaOm’s Kevin Fitchard looked at these reports, but dug a little deeper. He noted that, in some ways, SoftBank and Clearwire are kindred souls. Both companies are building time-division or TD-LTE networks, using the exact same 2.5 GHz band. The two are already partners in a global TD-LTE consortium – along with China Mobile and India’s Bharti – tasked with creating a handset and device ecosystem for their pet technology. A three-way marriage between Clearwire, Sprint and Softbank would only further those goals. Heck, Sprint could buy out Clearwire outright and build the fattest LTE pipe in the country with Clearwire’s treasure trove of spectrum.
By October 18, we saw confirmation that Sprint had acquired Eagle River Holdings LLC’s stake in Clearwire, a move that gives Sprint control over Clearwire’s board. Eagle River held a 4.5 percent stake in Clearwire. Sprint had also approached Comcast and Intel recently to discuss acquiring those companies’ stakes in Clearwire, according to the people who have knowledge of the Eagle River deal. It made little headway, they said. Eagle River is owned by Clearwire founder Craig McCaw who aimed to build the first nationwide wireless network that would allow people to browse the Web on mobile phones at broadband speeds. The company got a big boost in 2008, when an unlikely alliance including Sprint, Comcast, Intel and Google announced an investment of billions of dollars in Clearwire. But it later fell behind in the race to build next-generation networks amid mounting debts and squabbles with Sprint.
With control of Clearwire’s spectrum Sprint now controls more spectrum in the 100 largest US wireless markets than Verizon Wireless and AT&T together. But Clearwire’s spectrum is in a high frequency range that means its signal does not penetrate buildings as well as, or travel as far as, signals using lower-frequency spectrum owned by Verizon and AT&T. That means mobile telecom network operators using the higher frequency band have to build many more cell towers in the dense urban areas where most people live. Craig Moffett of Bernstein Research said Clearwire’s spectrum “remains problematic (because) it would be extraordinarily expensive to complete a network” using such high-frequency spectrum. Jonathan Chaplin, analyst at Credit Suisse, said Sprint “needs to make a clear choice – if Clearwire’s 2.5GHz spectrum is strategic/valuable, Sprint should buy all of it; if it isn’t, Sprint should stop throwing good money after bad.”
In Japan, news reports this week say Softbank will use its position in Sprint to pursue a purchase of MetroPCS Wireless. Softbank Chief Executive Masayoshi Son said he wouldn't rule out further deals in the U.S. even as he focuses on closing the acquisition of Sprint. Sprint CEO Dan Hesse said a merger between Sprint and T-Mobile was possible in the long term, but that Sprint for now was focused on overhauling its network and closing the deal with Softbank. He argued that a merger between the No. 3 and No. 4 carriers could be good for consumers by creating a more formidable competitor to market leaders Verizon and AT&T.
A piece that really caught our eye was business/consumer columnist Los Angeles Times David Lazarus’s Will SoftBank buy other U.S. telecom firms after Sprint? He writes that Softbank would be “crazy” to invest so much in Sprint just to remain in the shadow of industry leaders Verizon and AT&T. “But the Sprint deal looks a whole lot more intriguing if you also have plans to add other carriers to the fold.” It would be naive to think that SoftBank sees a multibillion-dollar investment to control Sprint as a final destination. Rather, it's a transit point to even grander ambitions. Lazarus speculates on a combination that includes both SoftBank-Sprint and T-Mobile/MetroPCS.
Good for Consumers?
Both the Softbank-Sprint deal and the T-Mobile-MetroPCS deal will be good for U.S. consumers since they will put more pressure on Verizon and AT&T, according to Kester Mann, lead analyst for operators at CCS Insight. SoftBank has a reputation as an aggressive Internet conglomerate at home, with a history of barging into new fields and undercutting its rivals with cheap prices, new services, and oddball advertising.
Cecilia Kang and Chico Harlan, writing in the Washington Post, noted that the Softbank-Sprint deal and the T-Mobile-MetroPCS deal revives a national rivalry with two underdogs newly motivated to lure away consumers from the bigger companies. In the near term, analysts say, that could mean consumers will continue to have access to data plans that charge one price for unlimited use — a practice the biggest companies have abandoned. T-Mobile will focus on frugal urban customers through cheaper, no-contract plans.
“Having competitors to Verizon and AT&T has been critical because they provide more options and put pressure on the big carriers,” said Matt Wood, policy director at Free Press.
“What this deal means for competitors is you have a potential powerhouse on your hands that has a ton of spectrum and now, finally, the finances they need to build out a system,” said Roger Entner, an analyst and founder of the Recon Analytics consulting firm. “What this means for consumers is the potential to sustain unlimited plans much longer and new and innovative pricing plans,” he said.
David Lazarus, who often writes from a consumer perspective, says the consolidation of the wireless market could have profound ramifications for consumers. With T-Mobile's deal for MetroPCS, one up-and-coming rival would be eliminated. SoftBank, on the other hand, wants a piece of the action. The only question is how big a piece. Short-term, a stronger Sprint would bolster wireless competition. Longer term, however, further consolidation among wireless companies is almost inevitable, experts say. And with less competition comes the likelihood of higher prices and less incentive to innovate.
Just speculation? First, consider again Sprint gaining control of Clearwire which currently leases space on its network to other wireless providers. Will the company continue doing that under SoftBank ownership, or will it dedicate all its resources to expanding Sprint's footprint? Or will SoftBank seek to acquire companies that now rely on Clearwire? One possible target: Leap Wireless International, which this year signed a five-year deal with Clearwire for high-speed mobile broadband service. Leap operates the Cricket brand, which, like MetroPCS, focuses on being a low-cost alternative to the big four.
Sprint anticipates that the Federal Communications Commissions will find the proposed transfer of Sprint's spectrum licenses to SoftBank "in the public interest." Moreover, Sprint expects the Department of Justice to complete a review of the deal within an initial 30-day period and won’t warrant an extended investigation.
“This is pro-competition and pro-consumer because it creates a stronger number three to compete with AT&T Wireless and Verizon,” said Sprint’s Hesse. “Over the longer term I think we will see consolidation in the US industry and what this does is give Sprint the balance sheet and financial flexibility to play a larger role in consolidation in the future.”
The deal is the largest acquisition of a US company by a Japanese buyer. Because the deal involves a majority foreign owner, the transaction will also be evaluated by the Treasury Department’s Committee on Foreign Investment in the United States for any national security concerns. Some analysts expect that AT&T will raise strong objections to the deal. Sprint strongly opposed the AT&T's failed bid to buy T-Mobile USA last year, leaving some bad feelings between the firms. AT&T issued a statement that noted Sprint’s control over Clearwire would convey to SoftBank “control of significantly more U.S. wireless spectrum than any other company.” AT&T said it expected “that fact and others” to figure into the federal review of the SoftBank deal. [See more on AT&T’s opposition here and here and here.]
Regulators and members of Congress may also express concerns about foreign ownership of a critical piece of the U.S. communications infrastructure. Analysts also said that regulators may be concerned that the proposed SoftBank-Sprint deal would make AT&T the only solely-U.S. owned of the four largest wireless carriers. Fourth-ranked T-Mobile is owned by Deutsche Telekom of Germany, while UK-based Vodafone owns 45% of Verizon Wireless.
"Under well-established FCC policy, foreign ownership above the 25% benchmark is presumed to be in the public interest for companies organized in WTO-member countries," noted Sprint spokesperson Scott Sloat.
Sprint has indicated it will not use network equipment made by Huawei because of the US Congress’s security concerns about the Chinese company.
“Almost any other deal outside of Verizon Wireless and AT&T Mobility will likely have little issues getting regulatory approval,” Christopher King, an analyst with the investment firm Stifel Nicolaus, wrote in a research note.
Federal regulators have signaled that they're comfortable with a wireless market composed primarily of four big players. So it's unlikely that a SoftBank-controlled Sprint would raise too many alarm bells with subsequent acquisitions. The real question would be if Sprint made a grab for T-Mobile. Such a merger would give the company about as many wireless customers as either Verizon or AT&T. It would also mean that just three carriers would control almost the entire market.
We’ll be sure to watch the federal review of the deal in Headlines [watch here] We’ll leave you, though, with a pointer to a very good analysis of the US wireless market written by our good friend, Harold Feld of Public Knowledge. He looks at foreign investors spending the equivalent of $25 billion to invest in competing carriers T-Mobile and to acquire control of Sprint and ClearWire; AT&T investing in network upgrades such as repurposing its 2G spectrum, clearing up the interference in the WCS band, and a seemingly endless stream of license acquisitions; and U.S. Cellular spending money to coble together a broader footprint using the less—than—stellar—but—better—than–nothing 700 MHz A block. And what does he create for all this investment? The Department of Justice and the Federal Communications Commission have made clear over the last two years that (a) we will have 4 national carriers, and (b) the FCC cares about ensuring enough spectrum access to keep Sprint and T-Mobile (and hopefully other competitors) viable. Contrary to all conventional wisdom, two years of FCC regulation like data roaming and special access reform, combined with antitrust enforcement around AT&T/T-Mo and Verizon/SpectrumCo, stimulates investment in the wireless industry and forces companies like AT&T and Verizon to get serious about developing the spectrum they need and ditching the spectrum they don’t need on the secondary market.