News Column

Fitch: Potential T-Mobile/Sprint Combo Fraught With Challenges

August 4, 2014

NEW YORK--(BUSINESS WIRE)-- A potential combination of two of the largest telecoms in the US is fraught with challenges, according to Fitch Ratings. Sprint Corp. and T-Mobile USA are reportedly close to a transaction in which Sprint would acquire T-Mobile for approximately $32 billion and the combined companies would be of comparable size to Verizon and AT&T.

If the transaction can pass regulatory scrutiny, we believe long-term success of a potential merger would depend on several factors, including an increase in scale and scope, improved execution, substantial capital investment and greater spectrum deployments over a long period. As part of his vision, Sprint's Chairman Masayoshi Son aspires for the company to become a third alternative broadband provider to in-home options with bandwidth offerings up to 200 megabits per second.

We believe Sprint would need increased scale and scope to drive better economics to increase its potential target market and become a more competitive alternative to fixed broadband. Current wireless data pricing is considerably more than wired data, particularly for video-centric households that consume large amounts of data. With mean aggregate broadband data usage for fixed access close to 50 GB and increasing rapidly, wireless is seemingly limited to smaller, more niche-type offerings like a bundled home/mobile bucket.

Regulatory approval will remain a substantial barrier. The Federal Communications Commission and Department of Justice have stated their desire to maintain a wireless marketplace with four operators as fewer competitors could increase risk of higher prices and less innovation. Thus any transaction would be judged on the merits of whether the public's best interests are served and if material antitrust elements are present. Additionally, the regulatory environment is not supportive of transformational transactions though we do think the rationale for supporting industry consolidation is sound.

In Fitch's opinion, regulators must widen their antitrust lenses when viewing the wireless and broadband markets to address the changes in technology and demand. We think regulators would need to believe wireless has the potential to become a viable competitive substitute for fixed wireline Internet access, which is currently an oligopolistic market. When combined with merger concessions to address antitrust concerns, this could mitigate the anticompetitive effects and increased market concentration resulting from the reduction in nationwide wireless providers from four to three.

Another factor in determining the long-term success of a potential Sprint Corp./T-Mobile USA merger will be the combined companies' ability to produce a wireless network at least on par with the industry leaders in terms of coverage, density and overall network quality. The merger would require an extensive and lengthy integration period. As such, given Sprint's past poor operational performance and lagging competitive position, the combined entity would need to substantially improve execution to compete more effectively.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: Walking the Tightrope (Potential Sprint T-Mobile Combination Fraught with Challenges)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752289

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Fitch Ratings

Bill Densmore, +1-312-368-3125

Senior Director

Corporates, Telecommunications

Fitch, Inc.

70 W. Madison Street

Chicago, IL 60602

or

David Peterson, +1-312-368-3177

Senior Director

Corporates, Telecom and Cable

or

Kellie Geressy-Nilsen, +1-212-908-9123

Senior Director

FitchWire

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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