The much speculated merger of No. 3 and No. 4 wireless companies T-Mobile and Sprint could give the combined entity as much as $3 billion in cost synergies, but would give competitors ample time to readjust their strategies.
T-Mobile and Sprint abandoned an effort to merge in 2014 after it was determined that it would not receive regulatory approval. But talks reportedly started up again last month, in part because of optimism around the new presidential administration being more open to mega-deals.
In a report issued Monday, Moody’s said a T-Mobile/Sprint union would create $3 billion in cost synergies for the companies. But the pairing would also take a considerable amount of time to complete, enabling competitors AT&T and Verizon to advance their own efforts and take market share.
In his report Moody’s senior vice president Mark Stodden wrote that any delays or operational problems along the way would be “catastrophic" for T-Mobile and Sprint.
But their combined spectrum holdings would allow T-Mobile and Sprint to continue to be aggressive on price and would allow a cost structure that “perpetuates unlimited pricing," he wrote. “History suggests that excess spectrum capacity can disrupt the high-margin businesses of incumbents, creating a structural imbalance in the telecommunications industry and pressuring pricing for years.”
The Moody’s executive also noted that concessions would likely be needed for any deal to pass regulatory muster.
“Both Sprint and T-Mobile USA have a track record of price disruption, and would likely be willing to commit to a regulatory mechanism that ensures continued price competition, especially in light of the spectrum advantage,” he wrote.
Competitors Verizon and AT&T also could benefit as the Sprint network wound down and any operational hiccups could damage the parties’ service reputation, while a failed integration could force them to sell spectrum, Stodden wrote.
The report "Sprint Corporation and T-Mobile USA Inc.: Potential Merger is Both Operationally Daunting and Financially Compelling," can be accessed by Moody’s research subscribers here.
