Sprint and T-Mobile Are Hashing Out Terms to Bring Deal Closer

Sprint Corp. and T-Mobile US Inc., in preliminary deal talks since at least August, agreed that Deutsche Telekom AG would have control in a combination of the two companies, said a person with direct knowledge of the matter.

The mobile operators are discussing a stock-for-stock merger, though are still weeks away from an agreement, according to the person, who asked not to be identified because the talks are private. Shares of Sprint and T-Mobile rose. Both companies declined to comment.

Deutsche Telekom would put T-Mobile executives, led by Chief Executive Officer John Legere, in charge of the combined company, the person said. That’s important for the German carrier, which owns about 64 percent of T-Mobile and has come to rely on it as a key driver of sales and earnings growth, according to a second person familiar with the talks. It favors a deal with Sprint because potential savings could come relatively quickly, the person said.

The idea of a combination between the No. 3 and No. 4 carriers was shot down by regulators in 2014, but with a new administration preliminary discussions picked up earlier this year. Washington regulators appointed by President Donald Trump haven’t signaled an insistence on maintaining a four-player nationwide wireless market that was a feature of the preceding administration.

“Such a deal would take at least a year to get approval and there is much logic on announcing a transaction before the November 2018 election cycle,” Jennifer Fritzsche, a Wells Fargo analyst, said in a note.

T-Mobile shares climbed as much as 5.3 percent to $65.10 in New York, the biggest intraday gain since Feb. 17. Sprint surged as much as 10 percent to $8.45, the most since Aug. 1. CNBC reported Tuesday details of the Sprint and T-Mobile talks.

Sprint has posted losses for a decade, even after SoftBank bought control in 2013 and returned the company to subscriber growth. As of June 30, the mobile operator had more than $12 billion in debt coming due in the next three fiscal years, putting pressure on SoftBank, led by billionaire Masayoshi Son, to find a partner.

Several issues stand in the way of a deal, according to people familiar with the matter. There isn’t a framework for structuring a stock-for-stock deal of this size when each side is controlled by a dominant shareholder. While SoftBank won’t control the new company, Son wants a significant say, two of the people said. The sides also must ensure they see the future of the industry in similar ways.

Still Apart

Neither Sprint nor T-Mobile has performed due diligence and price discussions haven’t started, two of the people said. Still, T-Mobile is highly unlikely to offer a significant premium for Sprint, one of the people said. The companies haven’t completed their regulatory reviews. A mid-October announcement date would be a best-case scenario, the person said.

Executives at Sprint and T-Mobile have said publicly that a merger makes sense because it would create a bigger wireless carrier to take on larger rivals AT&T Inc. and Verizon Communications Inc. Even combined, Sprint and T-Mobile would be smaller in subscriber size than the industry leaders.

The Justice Department’s horizontal merger guidelines paint “a reasonably bleak picture,” in part because the wireless industry fits the definition of being highly concentrated, Craig Moffett, analyst at MoffettNathanson LLC in New York, said in an email. Moffett said. The Federal Communications Commission, which also would judge the deal, may not view a three-player market as competitive, Moffett said.

“It is clearly much more feasible than it would have been under a Democrat regime, but that’s not saying very much,” Moffett said. He put the odds of approval at 50/50.

To see a Gadfly chart of merger candidates, click here

Speaking to investors over the past few months, executives from both Sprint and T-Mobile have lauded a potential merger of the two companies as offering substantial cost savings and creating stronger third competitor.

“Scale matters in this industry,” Chief Operating Officer Mike Sievert said at a conference in May. “We’re here to create value, we’ve shown you a value-creation case as a standalone, and the rational question for us all to be asking is: Can we turbocharge that in a way that’s advantageous for our shareholders.”

The mobile operators restarted discussions last month after Sprint’s exclusive negotiating period with Comcast Corp. and Charter Communications Inc. expired at the end of July, people familiar with the situation told Bloomberg in early August.

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