How About This

The Sprint/T-Mobile mashup was a hot topic a while back. Jonathan Schildkraut of Evercore ISI wonders whether or not the combination is still possible. The Department of Justice and the FCC made it clear that they want four wireless carriers, but a lot has changed since the initial merger discussions. One change is the introduction of more Wi-Fi first competition in the form of Google’s Fi project, but also offerings from other cable companies as well as the proliferation of existing Wi-Fi first players. Lately, there’s been a lot of talk about Sprint’s financing challenges and the investment to make to build out their network to compete with AT&T and Verizon. “As a result, a number of investors have asked us ‘under what circumstances could we see the government approving a S/TMUS combination?” Schildkraut wrote. The analyst noted that the easy answer is to wait for the next administration, but the firm sees another structure that would allow Sprint and T-Mobile to reap the benefits of combining without scaring away regulators: The creation of a new wireless network player through the contribution of all network assets from Sprint and T-Mobile.

Schildkraut explains that under this proposed structure, the two carriers would combine all of their network assets into a new company structured as a REIT. Then they would rent space on the assets, but together they would control 255 MHz of spectrum, which is more than AT&T’s 147 MHz and Verizon’s 116 MHz. The analyst explained, “This would allow for (1) increased network investment, (2) faster speeds on the back of a deep spectrum portfolio, and (3) a reduction in network costs (both spend too much given a lack of scale).” This would also maintain, or even improve, competition within the industry. At the same time, Schildkraut believes investors of both companies would benefit from stronger FCF [free cash flow] – though the firm acknowledges the carriers’ strong desires to maintain their own network and to differentiate from competition on this front.