Bankers involved in mergers and acquisitions have been checking their phones more often than text-crazy teenagers recently, to keep up with a flurry of offers for American mobile-phone companies.
On April 15th DISH Network, a satellite-TV operator, became the latest bidder to enter the fray when it launched a $25.5 billion offer for Sprint Nextel, the country’s third-largest wireless firm.
DISH is not the only suitor for Sprint. Last October Japan’s SoftBank offered to buy 70% of the wireless operator for just over $20 billion; and this week it boasted that its agreed deal promised “superior” benefits to DISH’s unsolicited one.
Sprint, in turn, is seeking to take full control of Clearwire, another wireless company of which it already owns half. And T-Mobile USA, the fourth-biggest mobile operator, is pushing ahead with a plan to merge with the fifth-largest, MetroPCS.
The scale of the bidding is breathtaking. According to Dealogic, a data provider, wireless deals worth $49 billion have already been announced in America this year, compared with $53 billion-worth of transactions for the whole of 2012.
And more telephone-number-sized offers could be on the way. What is driving this dealmaking? And who is likely to come out on top when the dust settles?
The answer to the first of those questions is that the bids are aimed at helping America’s mobile smaller fry compete more effectively with Verizon Wireless and AT&T, the behemoths that together serve about 70% of the country’s wireless subscribers. As the chart below shows, the two titans’ investment in their wireless networks and in the spectrum needed to carry voice and data traffic over them has dwarfed that of their rivals. “It’s a two-plus-two market in America now,” explains Rajeev Chand of Rutberg & Company, an investment bank, “and the two smaller guys have to figure out how best to compete and survive.”
The EconomistWhen it comes to spectrum, DISH has a clear edge over its rival for Sprint’s affections.
The satellite-TV firm, whose boss, Charlie Ergen, is a former professional gambler, has cleverly snapped up billions of dollars’ worth of airwaves which it has permission to convert to wireless use.
And in January it launched an unsolicited offer of its own for Clearwire. Mr Ergen has made it clear that DISH does not want to build its own cellular network, but would rather find a partner with an existing one.
SoftBank cannot offer Sprint airwaves in America, but it can bring plenty of cash to the table thanks to Japan’s near-zero interest rates. It also brings the experience of Masayoshi Son, the firm’s founder and boss, who snapped up several companies to turn SoftBank Mobile into an effective competitor against two larger rivals in the Japanese market. SoftBank claims it is on track to close its deal with Sprint on July 1st. But Mr Son may have to raise his bid if he is to keep Sprint’s shareholders on board now that Mr Ergen has joined the game.
T-Mobile’s owner, Deutsche Telekom, has already had to sweeten its offer for MetroPCS after facing pressure from shareholders in the American firm who felt the original terms would have left the combined company with too heavy a debt burden. On April 15th MetroPCS’s board approved the revised proposals, which will be put to shareholders on April 24th. If they are accepted the merged firm will have debt of $11.2 billion rather than $15 billion, and pay a lower interest rate than originally planned, giving it more financial flexibility to buy radio spectrum and build up its wireless network.
Regulators seem keen to give Sprint and T-Mobile a helping hand when it comes to spectrum. In a recent submission to America’s Federal Communications Commission (FCC), which oversees the telecoms industry, the Department of Justice urged it to make sure that the smaller wireless operators get a share of low-frequency bands in a future auction of spectrum given up by television stations. Both Sprint and T-Mobile are short of such spectrum, whose ability to carry signals over long distances and into buildings makes it especially valuable.
But even if they get such help, the smaller firms will still find it tough to prosper. Mike Garstka of Bain & Company, a consulting firm, says that in most mobile markets around the world the two biggest operators make virtually all of the profit, leaving smaller rivals battling to survive. This has certainly been the case in Europe, where a long tail of smaller operators have struggled to make money in an intensely competitive market.
So if they are ultimately to stay in business, Sprint and T-Mobile may end up having to join forces at some point. Some analysts speculate that if Mr Ergen fails in his bid for Sprint, he could pounce on the newly merged T-Mobile instead. Given his penchant for dealmaking, he could then try to engineer a blockbuster merger with Sprint—a move that would inevitably attract scrutiny from regulators.
Antitrust watchdogs rightly blocked AT&T’s attempt to swallow T-Mobile back in 2011. But both it and Verizon Wireless are unlikely to stand by idly while their competitors beef themselves up.
AT&T could bid for a satellite operator or other firm that brings it more spectrum. Verizon Wireless is already trying to persuade Clearwire to part with some of its airwaves. Verizon Communications, which owns a 55% stake in Verizon Wireless, is also keen to buy the remaining 45%, held by Britain’s Vodafone, to give the firm more operating flexibility. Any such deal would involve Croesus-like sums of money. Bankers in the telecoms-mergers business should make sure they keep their phones charged.
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