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T-Mobile Tries Out Its Sprint Pitch on Wall Street as Talks Get Under Way

T-Mobile US Inc. executives, in a series of public appearances and private meetings with investors over the past two weeks, have been talking up the potential for tens of billions of dollars in savings through a merger with Sprint Corp., laying the groundwork amid preliminary deal talks.

In discussions with shareholders, T-Mobile has highlighted Sprint’s $20 billion in tax credits, according to people familiar with the matter. Chief Financial Officer Braxton Carter told the audience at a JPMorgan Chase & Co. conference last week that a merger with Sprint could yield more than $30 billion in cost savings while “turbo-charging” T-Mobile’s ability to challenge larger rivals — a message aimed at both Wall Street and Washington.

While the discussions between T-Mobile parent Deutsche Telekom AG and Sprint owner SoftBank Group Corp. are still in an early stage, the efforts to play up the benefits of a Sprint merger are a trial balloon to gauge how open investors and regulators are to the idea. Both could still consider other options like a deal with Dish Network Corp., said the people familiar with the matter, asking not to be identified discussing private information.

The structure and valuation of a deal, which revives a merger plan that was shelved in 2014 due to regulatory opposition under former President Barack Obama, still remains to be solved. Through Thursday, Sprint stock was up 128 percent and T-Mobile had risen 59 percent in the past year, despite a fierce price war, as both companies gained subscribers and investors bet Donald Trump’s administration would look more favorably on a combination.

“They are crafting a message to take to D.C.,” said Jennifer Fritzsche, a Wells Fargo analyst. “The burden of proof will be to show why this is going to be better for the U.S. wireless consumer, because for the last four years the industry has been good for the consumer.”

Sprint rose as much as 1.9 percent to $8.71 on Friday, the highest intraday price in a month, while T-Mobile was up less than 1 percent to $68.11.

The Hurdles

To help on that front, Sprint Chief Executive Officer Marcelo Claure was in Washington late last month visiting with government officials. The trip went “really well,” Claure said in an interview last week. “I talked to a lot of good people. I told them about 5G.”

Claure is building on an argument first presented to Washington three years ago by SoftBank Chairman Masayoshi Son. The idea is that Sprint and T-Mobile will create not only a stronger third wireless player, but use advanced 5G high-speed technology to deliver the sort of data and video service that would compete with cable companies.

President Trump’s appointment to head the Federal Communications Commission, Ajit Pai, has already signaled an openness to a tie-up between the No. 3 and No. 4 carriers, and the nominee to lead the Justice Department’s antitrust division, Makan Delrahim, has said he doesn’t have preconceived notions about the ideal number of competitors in a market.

That is a significant departure from the regulators’ stance during the Obama administration, where they held a strong preference for an industry with four major players. Awkwardly, Sprint has bolstered the previous administration’s argument by offering aggressive discounts, forcing competitors to cut their own rates and lowering wireless costs for U.S. consumers. The company has said prices will have to come up over time.

Another potential problem for the deal is that the companies would need to eliminate overlapping positions to achieve cost-cutting goals. The promise of keeping and creating jobs not only helped propel Trump’s populist campaign, it has been one of the most consistent themes of his economic agenda.

One way to help deflect attention from staff cuts would be to talk about jobs created. T-Mobile could highlight the thousands of new jobs coming with the planned opening of 1,500 stores this year, and 1,500 each of the next two years. Similarly, Sprint pledged to return 5,000 jobs to the U.S. in December. That was preceded by the promise of SoftBank’s Son to Trump that he would help create 50,000 jobs related to a $50 billion tech investment in the U.S.

Hidden Assets

Sprint is under pressure to get a deal done sooner rather than later. The Overland Park, Kansas-based company has more than $11 billion of debt maturities due through 2020. It has $1.3 billion of bonds due this year, and $3 billion that mature in 2018. It will also make $2 billion in interest payments alone this year.

Sprint hasn’t had a profitable year in a decade, leaving a pile of credits from net operating losses that could benefit T-Mobile, though some of those tax credits are so old they are starting to expire. In its annual report to U.S. regulators last week, Sprint said its total NOL tax credits dropped to $16.4 billion from $19.6 billion a year earlier.

The company controls the largest holding of 2.5 gigahertz airwave licenses in the U.S., a “crown jewel” that has been obscured inside a money-losing business. SoftBank’s Son has considered measures like a spinoff of Sprint’s airwaves to help extract some of that value.

“The spectrum Sprint brings to the table is a key asset,” Fritzsche said. “I don’t think SoftBank and Sprint have felt that the 2.5 gigahertz is fully valued by the street.”

Deutsche Telekom CEO Tim Hoettges told investors this week his company is in a “position of strength” in the U.S. and has multiple options for how to proceed in the market.

While they may still be considering other deals, T-Mobile and Sprint have begun to sound as if they are talking from the same script. Even T-Mobile, which once said Sprint faced “a challenge of physics” to deploy 2.5 gigahertz spectrum, is now talking about the benefits of the asset.

“We have the densest network in the U.S. at this point,” Carter, the T-Mobile CFO, said at the JPMorgan conference last week. “You take the Sprint assets, you combine the two networks to have tremendous density. Then put the 2.5 in, and what that could do for 5G is give you massive future capex avoidance as this develops, and significant differentiation against the competition.”

The two rivals suddenly have a common vision.

“There’s been an interesting change in tone in T-Mobile’s messaging about 2.5 gigahertz,” Fritzsche said. “Before, it was unwanted and now it’s a treasure trove.”