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With AT&T’s deal to acquire T-Mobile USA on life support, T-Mobile may need to start considering a Plan B.
By itself, T-Mobile is a wireless operator struggling to keep its best customers from leaving. Over the past several months, the carrier has aggressively cut prices and made itself a haven for bargain seekers–all for the sake of sparking a little growth. As a result, it resembles more of large prepaid carrier than one of the traditional national players.
But with the promised breakup fee from AT&T if the deal isn’t approved, including $3 billion plus spectrum and roaming agreements with AT&T, T-Mobile could be coming into some cash. And that cash comes with some options. From going it alone to striking up new partnerships, T-Mobile can choose many different avenues to pursue.
Of course, AT&T could still pull off a miracle and get the deal pushed past objections from both the Justice Department and Federal Communications Commission–the ideal scenario for both companies. But it doesn’t hurt to consider T-Mobile’s options.
The solo route
T-Mobile, presumably flush with cash thanks to AT&T, could attempt to go at it alone. T-Mobile’s parent, Deutsche Telekom AG, hasn’t been subtle about its intentions to dump the U.S. market, but maybe a $3 billion cash infusion would change its mind.
“The breakup fee could give Deutsche Telekom some incentive to do something,” said Chris Lemley, a professor at Georgia State University’s business school.
AT&T attempted to sneak in a disclosure on Thanksgiving morning that it would take a $4 billion accounting charge in the fourth quarter to cover the potential fee.
In the meantime, T-Mobile will likely continue to act as the low-cost option for consumers. While the other carriers are busy building out more advanced 4G networks, boast stronger phone lineups that include the Apple iPhone, and have more marketing and service resources to employ, T-Mobile can only compete on price. Having lost a lot of high-value contract customers, the carrier is expected to continue its path of pushing its prepaid service, analysts say.
“Whether they can stabilize their business, we’ll see,” said Walter Piecyk, an analyst at BTIG Research, noting that the recent actions have helped improve some of its customer trends.
Go on a buying spree
DT could decide to put that $3 billion fee to work on potential acquisitions. T-Mobile could expand its prepaid presence by scooping up regional players such as MetroPCS or Leap Wireless, although both of the smaller companies use differing wireless technology.
More likely, T-Mobile could seek more wireless spectrum. The carrier currently lacks sufficient spectrum to move to 4G LTE, and DT has shown a reluctance to spend for that resource. The company could hope for more spectrum to be auctioned off by the government, or pursue an acquisition.
The company could also look at Dish Network, which has been slowly amassing a nationwide swath of spectrum. While Dish has a plan to build an LTE network, it could be willing to part with it or partner with T-Mobile. Likewise, Clearwire has said it is looking to sell some of its excess spectrum to raise cash.
Even if it doesn’t use the spectrum, having the extra assets could be valuable if T-Mobile were to look to sell itself again.
Either way, opening up its wallet would be a strange turn of events for a business whose parent has so traditionally been so reluctant to spend money in the U.S.
Pursue a cable hookup
T-Mobile could find allies in the cable providers, which have traditionally worked with Sprint Nextel. The cable companies are sitting on their own war chest of spectrum that fits perfectly with T-Mobile’s own assets.
“Cable is still very much an option,” said Craig Moffett, an analyst at Sanford C. Bernstein. “The opportunity to swing cable from the Sprint camp to the T-Moblie camp can’t be lost on Deutsche Telekom.”
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But it is unclear how a deal would be structured. The cable providers have no interest in running a wireless business, having learned their lesson from the failed Pivot joint venture with Sprint.
They currently offer some wireless service through a wholesale agreement with Sprint and Clearwire. Rather than buying the considerable amount of spectrum, T-Mobile could strike a deal in which it could obtain the spectrum in exchange for a stake in the business. Moffett noted that the cable companies could eventually back a T-Mobile initial public offering, which would succeed in lower Deutsche Telekom’s exposure to the U.S.
The cable companies, meanwhile, would get access to another wireless service provider and guard against the risk of Clearwire and Sprint dropping the ball on their 4G LTE deployment. Their current agreement with Clearwire has been an “utter debacle,” Moffett said.
Having another wireless provider would also help when negotiating for wholesale pricing, Piecyk added.
Alone, T-Mobile and the cable provider’s spectrum looks “stranded,” Moffett said. But together, the spectrum represents a nationwide swath worth as much as $30 billion. Practically, the cable company’s spectrum assets aren’t worth as much because there is no network or wireless provider willing to put them to work.
Which is why the cable providers and T-Mobile would fit nicely together.
Sprint and T-Mobile
This scenario has a lot of fans on Wall Street. But given the regulatory scrutiny that the AT&T deal is facing, it’s increasingly unlikely that the government would approve this combination. While Wall Street sees a combination between two weak players as good for the industry, regulators may be concerned that the merger of two low-cost providers may mean higher prices in general.
There are a number of other obstacles as well. Sprint Nextel and T-Mobile run on differing wireless technologies, requiring one to change over to the other. While Sprint has the ability to handle multiple wireless technologies with its planned network upgrade, that remains a major issue as the two sides attempt to reconcile their differences.
Sprint is low on cash and in no position to buy T-Mobile, so the deal would be structured as a merger of equal, with Deutsche Telekom taking a large–possibly majority–stake in the combined company. For Deutsche Telekom, that may not even be worth the trouble.
“It would be a smaller shareholder in a much larger and more complicated company,” Piecyk said. “Is that an ideal scenario?”
Switching parents
This is admittedly a bit more out there, but Deutsche Telekom could attempt to sell T-Mobile to another major global wireless provider looking to get into the U.S. business.
“There are a lot of players Deutsche Telekom could sell it to,” Lemley said. “It could get T-mobile access to new capital.”
One potential buyer could be China Telecom Corp. Earlier this month, the head of its Americas business told Bloomberg that it would start selling wireless service under its own brand next year. He also signaled a willingness by the company to buy its own wireless network.
Although given the U.S. government’s past attitude towards Chinese-American deals, it’s unclear whether such an acquisition would go through unscathed. Regulators have squashed smaller attempts by Chinese companies to acquire U.S. businesses, and a critical asset such as T-Mobile would easily find itself in the crosshairs of politicians.
With AT&T’s trial against the Justice Department not starting up until February, and AT&T’s willingness to fight tooth and nail to save the deal, there is still a lot of time left.
“Eventually, though, it will be time to entertain Plan B,” Moffett said.
