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September 04, 2014

Who Should Really Buy T-Mobile US: The Surprising Answer

Deutsche Telekom is supposedly in talks with French carrier Iliad to sell T-Mobile US, with DT asking at least $35 to $40 a share to begin discussions.   Supposedly, "financial and industrial partners" are linking up with Iliad for a purchase bid, but I'm skeptical that it would be good for anyone other than DT's bottom line.  And I'm sure there are other purchasers in the background.

Speaking of purchasers, T-Mobile US should have a check shortly for around $1 billion to $2 billion. T-Mobile reportedly demanded a $2 billion breakup fee if Sprint couldn't make the merger work.  It's not quite the $4 billion or so the carrier received from AT&T after it’s failed 2011 $39 billion bid, but it does represent a significant amount of money.  T-Mobile can take its time, extort, err, ask for another large breakup fee from Iliad to cover its bets and try to get the best price per share.

Last time, Iliad reportedly proposed $36.20 per share, but that included a whopping $10 billion in potential savings after the two companies merged.  Sprint offered $40 a share, according to wire reports.  How much more Iliad would have to offer this time around is an open question, but it will have to offer more.

DISH Networks is reportedly shopping for a wireless carrier and would take either Sprint or T-Mobile US.  Of the two, T-Mobile is more likely because Softbank has had Sprint less than a year and is more interested in growing what it has rather than selling it off.  I suppose in a twisted world we could arrange a 3 way swap between Softbank, DT, and DISH, with Softbank getting T-Mobile and DISH getting Sprint - but it'd be too complex to be practical.

It isn't clear how large of a bid DISH might make, but since it is already planning to take part in the 600 MHz spectrum auction taking place next year. Spectrum is nothing without a wireless network, so DISH could end up either buying a cellular carrier to take full advantage of it -- hence T-Mobile US -- or building out a network from scratch. Either option will be costly, but DISH would get an established customer base and infrastructure by purchasing T-Mobile.

DISH and T-Mobile would seem to make sense, other than the fact nobody's ever put together a satellite broadcast company with anything else, if I'm not mistaken.  Both have strong brands, but there are few apparent synergies (i.e., cost cutting measures) to make this a win-win.

What about another phone company?  AT&T and Verizon are out, but there's CenturyLink standing all alone, the third largest telecommunications company in the U.S. It has a market cap of around $24 billion, which means any acquisition would have to look more like a merger of equals.   DT could get a mixture of stock and cash, holding a minority interest in the new entity and giving it a stake in both wireless and more traditional telecom assets in the U.S.

More importantly, CenturyLink has vision. It is deploying gigabit services to 16 cities in its territory, so it knows fiber and owns fiber.   A CenturyLink/T-Mobile merger could offer much touted "synergies" of cost-savings through the merger of high-speed networks -- all the more attractive as T-Mobile rolls out a clean sheet all-IP LTE network.  Get rid of the legacy 2G/3G network and plugging in new towers in CenturyLink territories and facilities becomes a lot easier.

Enterprise sales get a lot more interesting as well.  CenturyLink offers both broadband and private cloud services.  Adding a native cellular capacity means the new company could mix and match wireless and wireline infrastructure for enterprises and "Internet of Things" (IoT) projects without breaking a sweat.

I'll be the first to admit that CenturyLink would have an uphill battle convincing DT to sell it T-Mobile, as well as keeping its own shareholders happy due to either raising debt for the purchase and/or diluting its own stock. On the other hand, existing CenturyLink shareholders would get a piece of the hottest wireless company in the U.S.  It's worth thinking about.




Edited by Stefania Viscusi


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