Pressure Shifts in the Telecom Market
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Given that the telecom market is virtually a duopoly between AT&T (NYSE: T) and Verizon (NYSE: VZ), it's hard to imagine news otherwise would make the headlines. However, T-Mobile's recent acquisition of MetroPCS (NYSE: TMUS) was all over the tabloids in past weeks, and surprisingly, the company that may have been affected the most wasn't even involved in the deal. By securing its purchase of MetroPCS, T-Mobile has turned up the pressure on Sprint (NYSE: S).
It is believed that the third and fourth place members in the telecom field, Sprint and T-Mobile, were jockeying for position in the acquisitions battle. Sprint, you may remember, did make a rather feeble attempt at MetroPCS earlier this year, but a hesitant Sprint board apruptly abandoned that effort. And you can't blame them, really. Let's not forget the Sprint-Nextel tragedy of 2005, in which the merger of Sprint and Nextel Communications produced the what is now a marred combination company.
However, the purchase of MetroPCS, the company which many analysts believed was the best company on the table with regard to potential acquisition, leaves few options for Sprint. Sprint does hold a larger market share, currently serving 56.4 million subscribers, while the new T-Mobile (including MetroPCS) has 42.5 million. Neither company is nowhere near the race for first, which currently features AT&T and Verizon jockeying for position. But Sprint and T-Mobile are competing for third and fourth -- with doubts that the market can sustain a fourth place much longer. Let's look at each company's market share according to its number of subscribers:
As you can see, Sprint has only about half the market share of the two "big guys." Yet many doubt that, with the market the way it is, T-Mobile and Sprint can both exist.
With the purchase of MetroPCS, only far less attractive options remain for Sprint, one of which is Leap Wireless International (NASDAQ: LEAP). Many thought that Leap was T-Mobile's primary choice. When it committed to MetroPCS instead, Leap shares fell 18% on the announced day of the merger.
Another potential deal in the making could involve Clearwire (NASDAQ: CLWR), which already provides high-speed data to Sprint. A further possibility rumored could include DISH Network, which has been unable to develop its own mobile phone network despite having plenty of spectrum. At a recent conference involving T-Mobile, Charles W. Ergen, the Dish Network's chairman, noted, "Sometimes when one door closes, a window opens somewhere else," hinting that he would be open to considering other options now that T-Mobile's off the table.
Some analysts have even promoted other options for Sprint, including buying the new T-Mobile to create a third striking force in the market. No one knows whether the FCC would approve such a deal, but the two companies together would hold about the same number of wireless customers as AT&T did, obviously posing a threat to the No. 2 company in the field.
Whether or not these predictions are realistic, there is surely added pressure on Sprint: It needs to assert itself as a present player in the field. And, last week, that's just what it did.
Sprint announced on the 11th that it was in discussions with Japanese telecom company SoftBank. The following week, SoftBank purchased about 70% of Sprint for about $20.1 billion, about $7.6 billion higher than analyst expectations. The deal remains unapproved by Sprint shareholders, but it's sent the stock skyrocketing 14% since the news broke.
The deal may have been just what Sprint needed: It have been trying to enter the LTE market that AT&T and Verizon brag so much about, yet it has been unable to acquire the necessary financial resources to do so.
The new deal will likely have little-to-no immediate effect on current subscribers: They will keep their phones and their plans. However, for SoftBank and Sprint, it means a combined 96 million subscribers worldwide and the potential for SoftBank to enter the American market after relinquishing attempts to further attack the now-tapped-out Japanese market.
Sprint is particularly excited about the idea of SoftBank because of their past: Years ago, the now-dominator in Japan once rose as a small company to beat a similar duopoly in the telecom field there. Now, SoftBank is clear in its intentions: to create the largest, fastest wireless network in the U.S.
The Foolish Bottom Line
The pressure has surely fallen off the shoulders of Dan Hesse, former CEO of Sprint and now the chief of "New Sprint." The deal transfers a lot of Sprint's problems to SoftBank, who will have its crack at the US market.
"It could be safe if you do nothing, and our challenge in the U.S. is not going to be easy at all," SoftBank founder and CEO Masayoshi Son said. "We must enter a new market, one with a different culture, and we must start again from zero after all we have built."
Michael Nolan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T.; 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.If you have questions about this post or the Fool’s blog network, click here for information.