As Sprint Corp. (S) - Get Report reportedly talks with Comcast Corp. (CMCSA) - Get Report and Charter Communications Inc. (CHTR) - Get Report about letting the cable giants use its network to offer mobile services, each side seems to be playing a complex negotiating game. One that involves T-Mobile US Inc (TMUS) - Get Report and Verizon Communications Inc. (VZ) - Get Report , and perhaps others.
How the game plays out could have a big impact on the U.S. telecom landscape in multiple respects. One thing is for sure, though: Sprint has a relatively weak hand to play, and the companies it's talking with know it.
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On Monday, June 26, the Wall Street Journal reported Comcast and Charter have obtained a 2-month exclusive negotiating window with Sprint -- it lasts until late July -- to discuss a mobile reseller deal. Such a deal could involve Comcast and Charter taking an equity stake in Sprint, thereby injecting the cash-strapped carrier with capital it could use to upgrade its network. It could also yield a full-blown acquisition of Sprint, but the WSJ cautions this is considered a "much less likely scenario."
The report comes less than 3 months after Comcast launched Xfinity Mobile, a service that relies on Verizon Communications' network and Comcast's 16 million Wi-Fi hotspots. And less than 2 months after Comcast and Charter announced a wireless partnership through which the companies could pool their resources in several operational and technology fields, even as they each sell their own mobile services. Charter, like Comcast, has a reseller deal in place with Verizon, one that the company has said it will use to launch a mobile service as soon as next year.
For the time being, the talks put on ice Sprint's widely-reported merger negotiations with T-Mobile. Notably, the WSJ says Sprint and T-Mobile "remained far apart" in their discussions before Sprint began talking with Comcast and Charter. Nonetheless, some sources (close to Sprint?) say that a deal with the cable firms wouldn't preclude a T-Mobile merger from happening later.
T-Mobile shares rose 0.7% in post-market trading on Wednesday to $61.48. Sprint shares rose 1.3% to $8.29.
Why are Comcast and Charter talking with Sprint, widely seen as having the worst network of the big-4 U.S. carriers, when they have deals in place with Verizon, which is widely seen as having the best network? Because Sprint could offer much better terms. The WSJ says Masayoshi Son, head of Sprint parent SoftBank, is offering Comcast and Charter "unprecedented flexibility, including control over things like customer SIM cards." That gives them level of customer control that Verizon doesn't provide, and could let them easily leave Sprint for another network down the line.
Chances are that Sprint, given its network quality and recent retail pricing actions, is also undercutting Verizon's wholesale pricing. Though Comcast's Xfinity Mobile pricing is competitive for users who -- whether due to their mobile habits or proximity to Comcast hotspots -- don't need to consume a lot of mobile data, its unlimited data pricing is less so, particularly in today's hotly competitive mobile environment. A Sprint deal could enable cheaper plans.
And Sprint's financial woes, together with the fact that a T-Mobile deal doesn't seem especially close, give Comcast and Charter room to drive a hard bargain. The carrier had $32.6 billion in net debt as of March, and its Sprint platform wireless service revenue fell 7% annually to $5.7 billion thanks to heavy discounting.
Moreover, Sprint produced just $521 million in free cash flow (FCF) during the fiscal year ending in March in spite of cutting its cash capital expenditures to a mere $1.95 billion. With Sprint promising to spend $3.5 billion to $4 billion in cash capex this fiscal year to keep its network quality from becoming an even bigger liability, staying cash-flow positive is shaping up to be a tall order.
T-Mobile, in much better financial health than Sprint and now possessing the low-band spectrum needed to narrow Verizon and AT&T Inc.'s (T) - Get Report network edges, might likewise be using Sprint's dire financial position to take a hard negotiating line. Sprint clearly needs T-Mobile right now far more than T-Mobile needs Sprint. And with any merger agreement between the companies bound to face a lengthy and distracting regulatory review that's by no means guaranteed to end in approval, T-Mobile has extra incentive to demand favorable terms.
Sprint may be hoping that a deal with Comcast and Charter will shore up its balance sheet and strengthen its competitive position, and thus position it to strike a more favorable deal with T-Mobile. Or, if T-Mobile refuses to budge from a hard line, provide it with another option for surviving. On the other hand, it's possible that Comcast and Charter are trying to use Sprint as leverage to obtain a better deal from Verizon, which again provide them with a much better mobile network to market to consumers.
It's also possible that Charter, which reportedly turned down a $100 billion-plus buyout offer from Verizon, might be hoping that Verizon will make a new offer. However, the fact that Comcast and Charter's partnership prevents either company from discussing a major wireless deal without the other's consent for one year is probably a deterrent for now.
Another possibility still is that AT&T could try to ink a deal with Comcast and Charter. Or that #4 U.S. cable provider Altice USA (ATUS) - Get Report, which just did a successful IPO, could try to partner with Sprint. With cable providers, aided by their hotspot networks and ability to sell quad-play service bundles, set to have a disruptive impact on the U.S. mobile market, all four incumbent carriers have good incentives to strike reseller deals with the biggest cable firms.
It's a very tangled web, one which Sprint has to navigate very carefully. The company needs to provide Comcast and Charter with a deal whose pricing and equity terms make it more favorable than what they can get from Verizon or any other big-4 carrier, in spite of its inferior network and spectrum position. And the deal's terms can't be so bad that it puts Sprint's viability as a standalone company into doubt and/or make T-Mobile think twice about offering better merger terms.
If there was ever at time for Masayoshi Son to prove that his reputation as a great dealmaker is justified, this is it.
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