T-Mobile Merger Shakes Up Sprint, Leap

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The competitive landscape for U.S. telecoms is changing -- particularly once you look past the two top players, Verizon and AT&T (NYSE: T). Witness the recently announced merger between MetroPCS (NYSE: TMUS) and T-Mobile, which is a subsidiary of German telecommunications giant Deutsche Telekom AG (NASDAQOTH: DTEGY.PK). 

MetroPCS is focused on the low-cost, pre-paid part of the U.S. telecom market, while T-Mobile is currently running a poor fourth behind Verizon, AT&T and Sprint Nextel (NYSE: S). The German company will control about 75% of the combined entity, which will be listed.  

This merger was made possible by MetroPCS launching a 4G network using LTE, making the two companies' technologies similar. Deutsche Telekom is spending $4 billion in building an LTE network. The lack of such a network to date is the main reason T-Mobile is falling further behind its competitors. The spectrum (the radio portion of the electromagnetic spectrum that carries calls,etc.) of the two firms is largely complimentary, and the combination fills a hole in T-Mobile's spectrum in the northwest United States where it has poor coverage. 

The combined companies will control 12% of the U.S. mobile telecom market and 29.5% of the pre-paid phone market. The proposed merger is unlikely to face the same regulatory scrutiny as the last attempted move by Deutsche Telekom to solve its U.S. “problem.” In that case, it offered to sell T-Mobile to AT&T last year for $39 billion. Of course, Deutsche Telekom wasn't too upset when the regulators said no, as it pocketed a $3 billion break-up fee from AT&T. 

The proposed deal probably won't keep the managements at Verizon and AT&T up at night, worrying. But it may be a different story for the managements at Sprint Nextel and Leap Wireless International (NASDAQ: LEAP). 

As far as Sprint goes, the merger puts T-Mobile more on par with it. T-Mobile already has 33 million subscribers and MetroPCS has 9.3 million customers. That puts the merged company closer to Sprint Nextel's 56 million user base. In addition, the new company will have “expanded scale, spectrum and financial resources. (T-Mobile will have access to new funding) to aggressively compete with the other national U.S. wireless carriers”. 

That new aggressiveness is hardly good news for Sprint, which is already struggling under a $21.3 billion debt burden. It may not be able to spend as much as it would like to fend off the new T-Mobile. However, do not be shocked if Sprint launches its own counterbid for MetroPCS. Rumors of the bid already surfaced in the past few days. 

Then we come to Leap Wireless, a company whose stock is down 93% from its peak in 2007. Many thought it was going to be taken over by MetroPCS, which also targets pre-paid customers. That is why Leap's stock plunged after the merger announcement with T-Mobile. A takeover seems to be the only solution for Leap Wireless, a company that has been incurring losses since 2006. And according to Bloomberg, it will keep racking up losses for at least the next several years (to 2016). 

What about a possible Leap-Sprint Nextel deal? Unlikely. Leap Wireless has $3.2 billion in long-term debt on its books, and it's questionable as to whether Sprint will want to further add to its already cumbersome debt burden. But perhaps eventually the merged MetroPCS and T-Mobile will do so. 


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