Picture: BLOOMBERG/ ANDREW HARRER
Picture: BLOOMBERG/ ANDREW HARRER

New York — T-Mobile US and Sprint have agreed to a $26bn all-stock deal and believe they might win over sceptical regulators because the merger will create thousands of jobs and help the US beat China to creating the next generation mobile network, the company said on Sunday.

The agreement caps four years of on-and-off talks between the third- and fourth-largest US wireless carriers, setting the stage for the creation of a company with 127-million customers that will be a more formidable competitor to the number one and number two wireless players, Verizon Communications and AT&T.

US regulators, which have challenged in court AT&T’s $85bn deal to buy US media company Time Warner, are expected to grill Sprint and T-Mobile on how they will price their combined wireless offerings.

Sprint’s and T-Mobile’s first round of merger talks ended unsuccessfully in 2014 after then US president Barack Obama’s administration expressed antitrust concerns.

The new deal will create the highest capacity US network, lower prices, create jobs and improve service in rural areas, said John Legere, the CE of T-Mobile and the new head of the proposed combined company.

The combined company, which will be called T-Mobile, will invest $40bn in the next three years to upgrade its networks to accommodate the next generation 5G wireless technology, which is expected to have the speeds necessary to power drones and self-driving cars, Legere said.

T-Mobile and Sprint said they expected to complete their deal no later than the first half of 2019, an ambitious goal given the intense US regulatory scrutiny to which it will be subjected.

T-Mobile will not be liable to pay Sprint a break-up fee should regulators block the deal, according to sources who asked not to be identified because that detail in their contract has not yet been made public.

The companies said they expect US regulators would see the benefits of the deal.

"This isn’t a case of going from four to three wireless companies — there are now at least seven or eight big competitors in this converging market," Legere said. Other companies would be forced to accelerate their investments in the face of a combined T-Mobile-Sprint, the companies said.

CTIA, a trade organisation that represents the US wireless communications industry, ranks the US behind China and South Korea in 5G readiness.

A spokeswoman for Federal Communications Commission (FCC) chairman Ajit Pai declined to comment on Sunday on the proposed merger.

The FCC will decide whether to grant the deal regulatory approval and if deal is in the "public interest" Legere said the deal would likely lead to lower prices for competitors, including AT&T and Verizon, as well as Comcast Corp.

AT&T declined to comment. Comcast could not immediately be reached for comment.

Verizon declined to comment on prices but said it remains committed to building a 5G network.

The breakthrough in the companies’ negotiations, first reported by Reuters on Thursday, came after T-Mobile majority-owner Deutsche Telekom and Japan’s SoftBank Group, which controls Sprint, agreed on a structure that will allow Deutsche Telekom to continue to consolidate the combined company, which will have a market value of more than $80bn, on its books.

Deutsche Telekom will own 42% of the combined company and will control the board of the combined company, nominating nine of the 14 directors. Legere will also serve as a director.

The implied equity valuation for Sprint is $6.62 a share based on T-Mobile’s closing share price on Friday. Sprint shares closed on Friday at $6.50.

The all-stock transaction is at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each T-Mobile US share.

Tokyo-based SoftBank and Deutsche Telekom will sign a voting rights agreement that will give Deutsche Telekom access to voting rights for a total of 69% of T-Mobile shares.

The second round of talks between Sprint and T-Mobile ended in November over valuation disagreements.

Since then, Sprint’s shares lost about a fifth of their value amid questions about how the company can compete effectively under the weight of its long-term debt of more than $32bn.

Even though Sprint’s customer base has expanded under CEO Marcelo Claure, growth has been driven by discounting. Analysts say that, without T-Mobile, Sprint lacks the scale needed to invest in its network and to compete in a saturated market.

T-Mobile has fared better than Sprint, even if it remains a distant third to Verizon and AT&T. It has managed to score sustained market share gains, as innovative offerings, improving network performance and good customer service attract new customers, according to Moody’s Investors Service.

T-Mobile became the first major US carrier to eliminate two-year contracts, a shift quickly embraced by consumers and copied by competitors. The company has also badgered rivals with its unlimited data plans.

Both Sprint and T-Mobile are far behind Verizon and AT&T in upgrading their network to accommodate next generation 5G wireless technology. Even after their merger, the combined company’s budget to invest in 5G will be smaller than Verizon or AT&T.

However, Sprint and T-Mobile hope the deal will give them more firepower to participate in auction for spectrum to develop 5G.

They plan to participate in a spectrum auction and will request a waiver if the merger prevents the companies from participating.

Reuters

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