What Sprint’s Potential Acquisition of T-Mobile Could Mean to Cellular Leaseholders
On Friday, June, 6, 2014, news reports began to filter in confirming that Sprint and T-Mobile had agreed on terms whereby Sprint would acquire T-Mobile in a deal worth approximately $32 billion. This merger will cap a significant culmination of other mergers: T-Mobile recently acquired MetroPCS and Sprint acquired Nextel and Clearwire.
The two companies have approximately 100,000 cell sites between them and provide service to approximately 107 million subscribers. Undoubtedly, one of the reasons for the merger is that the number 3 and 4 carriers can combine and operate more efficiently by paring down operating redundancies – in other words, by figuring out what assets they have that serve the same purpose and eliminating those that are unnecessary. In the past two years, Sprint has turned off at least 20,000 cell sites, including many Nextel sites and some Clearwire sites. In the last two months, we have started to see MetroPCS terminations for cell sites that were redundant in the combined T-Mobile/ MetroPCS merger.
Before we start discussing what will happen to all these cell sites, it is important to note that there are two crucial milestones that must happen before you need to be truly concerned about your rental income from either T-Mobile or Sprint cell sites. First, the companies have yet to officially declare that they will merge, although we expect that this will occur shortly. Secondly, the companies still have to submit to the FCC and the Department of Justice for approval of the merger. This will undoubtedly be an uphill battle for Sprint/T-Mobile to push through due to legitimate concerns regarding the reduction of competition in the wireless industry.
Reasons that the FCC/DOJ might support the merger.
1. Obama’s goal.
The Obama administration has the FCC on board to incentivize 4G LTE build-out nationwide to meet rising data demands as well as to ready the nation for First Net – a seamless network that will be available for first responders and 911 calls. The government is not about to foot the bill alone.
2. Rural development
Sprint was likely thinking ahead when it recently partnered with two rural development associations: the Competitive Carriers Association (CCA) and the NetAmerica Alliance. The partnerships, which seek to form reciprocal roaming agreements with rural carriers that will help fund future LTE deployments, is right up the FCC’s alley. Spectrum sharing is highly favorable to the FCC, as are rural build-outs in general. If the companies can provide evidence that their union will be able to better afford them the push they (or it) needs to become a viable rural home broadband competitor, then this will strengthen their case to the FCC who seeks to speed up rural deployment of broadband. If the merger is confirmed, it is highly likely that there will be minimum rural area deployment requirements.
3. Capital expenditures and competition
In 2013, U.S. wireless capital expenditures were at an all-time high. This is good for the nation’s GDP and economic growth. According to Roger Entner of Recon Analytics, “AT&T’s attempt to overtake Verizon in network quality had the company spending roughly $11.5 billion on network improvements, while Verizon Wireless spent another $9.75 billion improving its network.” If Sprint and T-Mobile are granted their union, they will still need to merge their actual networks, which might take some time. However, once they are up and running, provided that all goes well, they will likely invest a comparable amount to improve their networks. And given their economy of scales and overlapping coverage, the thought is that they will expand outwards as opposed to simply improving their overlapping and competing existing networks to keep up with AT&T and Verizon.
4. Left to its own devices, Sprint may fade away over time leaving the nation with 3 competitors anyway.
Sprint has been losing customers every quarter for more than two years, likely as a reaction to the shutdown of its Nextel network and the transferring of technology. Sprint reported that it lost over 750,000 customers in the first quarter of 2014 alone. This contributed to a loss of over $151 million, which wasn’t quite as much as the $643 million loss recorded a year earlier.
Reasons why the FCC/DOJ might not approve the merger
1. Reduction of Competition
Analysts have varying views on whether or not a Sprint/ T-Mobile union will increase or decrease competition among carriers. Some say that rather than reducing the number of major players from four to three, it would in fact add a third contender to the top two. In other words, the union would give the new entity the means to truly compete with AT&T and Verizon, which neither company has independently been able to do. The opposing view however – that the merger will reduce competition is the one that will be at the core of the antitrust regulators debate, especially considering that T-Mobile added two million subscribers in 2013 and seems to be climbing the hill quite nicely on its own. Additionally, other pairings have been cited as better possibilities for T-Mobile, such as a possible partnership with satellite TV provider, DISH, which has also been gaining momentum in the wireless world (and spectrum).
2. Network Technology snafu
Sprint experienced problems when it merged with Nextel and had to reorganize both companies’ networks. Will the same thing happen with T-Mobile? Sprint operates a 3G CDMA network and T-Mobile a GSM. Both are building out LTE, but are using different spectrum swatches. They will stand to gain at least 30 MHz of 600 MHz broadcast spectrum next year, separately, but it’s unsure what will happen if they become one – and without spectrum, infrastructure deployment remains at a stand-still.
3. Will a Sprint/ T-Mobile merger improve coverage?
Some industry analysts have said that a merger would not result in an expansion of coverage because the companies’ networks currently overlap so much. In other words, their subscribers might not benefit without significant network upgrades. The newly formed entity would not only need their subscribers to be happy, but also seek to gain new ones from AT&T and Verizon. We’re not sure that they would be able to offer anything substantial, but the current price-cutting efforts have locked in a good many for the next couple years, at least.
4. Precedence
Three years ago, the FCC rejected AT&T’s $39 billion bid for T-Mobile, stating that a combination of the two companies would “eliminate the important price, quality, product variety, and innovative competition that an independent T‑Mobile brings to the marketplace.” The FCC recently commenced discussions of spectrum caps in the upcoming broadcast TV white space auction with the intention of preventing any one carrier from amassing too much spectrum. If Sprint and T-Mobile remain independent, then each company is expected to gain a good portion of valuable spectrum, which would do well (ideally) to boost their positions relative to the Big Two who aren’t expected to favor as well in next year’s auction. In fact, the newly released rules regarding the spectrum screen (a cap on lucrative spectrum) were devised with the intent of making smaller carriers (Sprint and T-Mobile included) “more competitive.”
5. Innovation
The argument that the two companies will fail if they don’t combine is a harder one to make. Under the leadership of John Legere, T-Mobile has been very successful as of late with reframing the way carriers do business. Since the FCC denied AT&T’s bid to takeover T-Mobile in 2011, T-Mobile has become an aggressive player in the wireless industry. The $3 billion it received as part of the break-up fee was used wisely to market new cellphone plans that allowed subscribers what they wanted (unlimited data, low prices and flexible contracts), and also to upgrade its network infrastructure. For instance, T-Mobile rolled out its nationwide LTE network in just six months (from March 2013 – September 2013) at an unprecedented pace, and projected that it would reach 250 people by 2014 year-end. Additionally, T-Mobile recently purchased 700 MHz A-block spectrum from Verizon, which will cover 158 million people in major U.S. cities (and purchased more from U.S. Cellular in 2013). With growth and innovation like this, it will be difficult to convince regulators that T-Mobile needs help from Sprint in order to drive innovation in the marketplace.
6. AT&T and Verizon have some sway
Obviously, AT&T and Verizon (who contribute very significantly to the nation’s capital expenditures) do not want the deal to go through. They also have heavy sway in the government policy realm. Quite frankly, they are not going to allow this deal to go through without a fight.
Assuming the merger gets approved, it is likely still too early to say for sure exactly which sites will be kept and which sites will be terminated.
There are some predictions we can make, however.
1. Stalled activity.
Sprint and T-Mobile will likely cease activity right away while awaiting approval from the FCC and DOJ. New site development (however limited it is currently) will stop. Existing LTE modification work and integration of the Clearwire 2.5GHz spectrum and sites into the Sprint Network Vision (Link to Network Vision page) will continue. T-Mobile will likely stop doing pretty much everything while Sprint determines how to integrate the two diverse networks. Given Sprint’s abject failure with the integration of Nextel, it will be interesting to see how well they do with this merger assuming it gets green-lighted by the FCC and DOJ.
SPRINT NETWORK:
CDMA/FDD-LTE on 800MHz (Nextel rebanding) and 1900MHz (Sprint PCS)
TD-LTE on 2500MHz (Clearwire)
T-MOBILE NETWORK:
FDD-LTE on 1700MHz (T-Mobile/MetroPCS)
GSM/HSPA+ on 1900MHz (T-Mobile)
CDMA/HSPA+ on 1900MHz (MetroPCS)
2. Sprint/ T-Mobile Lease devaluation.
Lease buyout companies will use the opportunity to reduce pricing for Sprint and T-Mobile leases due to the pending merger and the lack of clarity regarding the future of such leases. Some lease buyout companies might opportunistically try to convince landowners to sell them both leases at discounted values. Historically, when a potential merger was occurring the lease buyout companies used one of a few tactics:
- They would make offers on both merger carrier leases, sign letters of intent with the landowners, and then choose to cherry pick the lease they felt had better probability of being kept.
- They would make offers on both leases, only to attempt to renegotiate a lower price during the due diligence phase. This would occur even though they knew fully well that the merger was occurring when they signed the letter of intent.
- They would make offers on both leases at a reduced amount but would try to take what is known as a first-loss position- meaning that no matter which lease was terminated, they were guaranteed that they would be paid whatever revenue was still being received. This allowed them to not have to guess which lease was being terminated.
The lease buyout companies will likely pull back offers that they have already made for Sprint and T-Mobile leases while reducing pricing on future offers they make. Furthermore, they might use this opportunity to revise their overall pricing for leases.
3. Portfolio volatility
The tower companies will come out with press releases indicating what percentage of tower sites they have that contain overlap between Sprint and T-Mobile sites. They will try to suggest that such a merger won’t hurt them very much due to guaranteed terms in their collocation leases with both companies. They will also completely gloss over the fact that if the two companies merge, neither T-Mobile nor Sprint will need as many new sites in the future as they would if they were separate entities. This impact not only the tower companies future expectations of growth but also their stock prices, which are based upon estimations of future growth. It also impacts the amount of money they can pay to buyout their own ground leases especially on towers that have T-Mobile and/or Sprint as collocation tenants.
Furthermore, the tower companies will have to reduce their pricing they pay for cell tower portfolios. Current pricing for cell towers is based upon the expectation of future growth, both from new tenants being added to the tower and from future modifications to the existing equipment on the tower. With both Sprint and T-Mobile slowing down or possibly delaying new site development, the tower companies will need to examine their revenue projections. Both AMT and CCI spoke very highly of their expectations of future growth from Sprint and T-Mobile whom they both felt would be aggressive in their new site development over the next few years.
4. Increased activity from AT&T and Verizon
Possibly the only good news here is that AT&T and Verizon will likely seize upon the freeze by Sprint and T-Mobile to further push their advantage. While there may be temporary work stoppage while they determine where and how best to place their resources, both companies will come back aggressively to build a faster and more robust data network. Both will also lobby aggressively against the potential merger to the FCC and DOJ.
As you can see, there isn’t much good that comes to landowners and tower owners out of this potential merger. Hopefully, the DOJ and FCC decline to approve the Sprint/T-Mobile merger. However, if they don’t, Steel in the Air will be ready to help you determine the best course of action regarding your building, tower or land.
