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Why the us spectrum war is the driving force behind us telecoms m&a (linked in version)

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Why the us spectrum war is the driving force behind us telecoms m&a (linked in version)

  1. 1. Why the US mobile spectrum war is the driving force behind the T-Mobile & Sprint merger and the changes in the US telecoms market structure
  2. 2. 2 Executive summary Mobile spectrum needs are the driving force behind the US telecoms M&A frenzy  The US telecoms regulator (FCC) and mobile operators chose to prioritize mmWave spectrum in order to launch 5G; however mmWave limitations make this choice unsustainable in the longer run, increasing mid-band spectrum attractiveness  In their quest to launch nation-wide 5G networks, mobile operators are increasingly looking for additional ways of acquiring mid-band spectrum, mainly through M&A deals  Spectrum allocation and holdings have been shaping the US telecoms market for the past decades and will remain the main driver M&A and partnerships for the 5G era Spectrum, spectrum, spectrum Key players US telecoms market  The US mobile telecoms market is mainly split between 4 national players  A long awaited merger between Sprint/T-Mobile might boost T-Mobile spectrum and Sprint business fortunes  In order to approve the merger, the DoJ (Department of Justice) wants to establish a 4th mobile player to maintain market competition Possible scenarios  Sprint: while struggling on the business front, Sprint holds the most important share of mid-band spectrum making it an attractive target  Dish: holds significant spectrum, but do not operate a telecoms network yet, it is faced with a march 2020 deadline to either sell or operate  T-Mobile: needs to acquire spectrum in order to power network operations and its upcoming nation-wide 5G network  Other players: Verizon and AT&T need spectrum while non-telecoms players (Charter, Comcast, Amazon …) are looking for telecoms synergies and/or mobile telecoms diversification Merger goes through Merger plan falls apart T-Mobile / Sprint merger as the cornerstone of the US telecoms market  New T-Mobile sells Boost, some spectrum holdings & eventually a part of Sprint’s former network to Dish, who can: ‐ Run an MVNO ‐ Build/upgrade a network with dedicated spin-off and/or resell the business  The new T-Mobile sells Boost & some spectrum holdings to Amazon who will partner with Dish to build a new mobile network  Sprint is acquired by another player (Dish, Comcast, Amazon, …) or Sprint to sell a part of its spectrum to other mobile operators  T-Mobile to find alternatives to get spectrum (Leasing or asset swap with Dish, lobbying toward FCC for the C-band auction … )
  3. 3. 3 The US mobile telecoms market is split between different categories of players… a Sprint merger would allow T-Mobile to challenge the mobile "big twos" Spectrum policy in the USA has led to spectrum assets imbalance among telecoms (And non- telecoms) operators… This created a marketplace for operator-to-operator transactions  Verizon had a lot of spectrum, yet its 4G push was so successful, that the company is craving for more for both 4G and 5G  T-Mobile bought MetroPCS and repurposed its spectrum for 4G yet it needs mid-band spectrum for its 5G roll out  Sprint had a legacy spectrum war chest thanks to multiple acquisitions (Clearwire…) Tier 1 Tier 2 Tier 3 NationalplayersRegionalplayers T-Mobile, as the distant No. 3 to Verizon - Inc. and AT&T Inc., has probably grown almost as much as it can on its own. Its achievements are quite impressive, but the company might have peaked as a smaller, low-cost, pure-play mobile provider.  Sprint and T-Mobile need one another to go up against Verizon and AT&T, both companies have a much more solid future together. Apart, they're fighting a small fight against each other while the Big Twos telecoms operators spread out to TV-and-movie entertainment and cable-and-streaming services.  Sprint would face significant challenges were it to continue on its own : its network requires costly upgrades in order to stop losing clients to T-Mobile A Sprint/T-Mobile merger offers incomparable synergy opportunities, and boosts business momentum as it would give more scale to the combined entity to take on "the big twos"  T-Mobile-Sprint would rationalize and enhance one single national network  …leveraging the greatest value Sprint offers which would be its spectrum (Sprint has a spectrum war chest stemming from its Clearwire acquisition, those holdings complementing T-Mobile's)  The new entity could be commercially aggressive in new markets as it could serve more clients  …yet multiple reports have indicated that T-Mobile has offered or is considering additional and more tangible conditions to obtain approval from the DoJ, enabling and accelerating a new well-funded competitor into the US wireless market. Why merge two tier 2 telecoms operators?  Achieving scale, in order to compete on commercial grounds, investment, network... with tier 1 telecoms operators  Acquiring spectrum holdings in order to power network operations and complement each other  AT&T and Verizon are still unchallenged at the top due to their scale (In terms of client base as well as spectrum holdings)  Sprint and T-Mobile are expanding out their networks and working to establish competitive differentiation through pricing and marketing,  Smaller players such as regional players such as C-Spire, US Cellular and Cellular One trying to catch up with their own 4G services. The US mobile telecoms market is three-tiered Rationale for a T-Mobile/Sprint merger
  4. 4. 4 Spectrum allocation and holdings have been shaping the US telecoms market for the past decades, now the "race for 5G" is turning into a "gold rush for mid-band" Mid-band vs. mmWave spectrum: round 2, fight! Current ownership as well as need for mid-bands is going to shape the US telecoms market Spectrum land grab  Sprint has the biggest chunk of US allocated spectrum in the US market, which makes Sprint the most coveted company for the past 3 years  Sprint could bolster its holdings as the FCC prepares to open up a slice of valuable mid- band spectrum in the 2.5GHz band: it will be able to consolidate 194MHz of contiguous mid-band spectrum (EBS-CBS bands) mmWave spectrum has much ado about nothing?  The FCC has been pushing forward with a mmWave 5G spectrum strategy while the rest of the world has made the mid-band spectrum choice  Yet disappointing early mmWave 5G launches by Verizon, have shifted the focus from mmWave to mid-band in the US: indeed even if mmWave spectrum enables high throughput, it does requires a clear line of sight, and has very low real life results in urban dense areas Spectrum bands  Low-band newly allocated spectrum for mobile networks include the 600 MHz and 700 MHz bands. These bands are ideal for wide-area and outside-in coverage as well as for deep indoor coverage  Mid-band new spectrum has been widely allocated in the 3.5 GHz band, with more spectrum planned to be made available in the 1.5 GHz (L-band) and 5 GHz (unlicensed) bands. This will enable high-capacity and low-latency networks with better wide-area and indoor coverage than high-band spectrum, the mid-band spectrum is an optimal compromise between coverage, quality, throughput, capacity and latency.  High-band (mmWave) spectrum clearly provides the anticipated leap in data speed, capacity, quality and low latency promised by 5G. New spectrum bands are typically in the range 24 GHz to 50 GHz, with contiguous bandwidths of more than 100 megahertz per network. Source: Ericsson Mid-band holdings of main US mobile operators (in Mhz)  T-Mobile has been playing catch-up getting spectrum via public auctions so far, and bets on its Sprint acquisition to bolster its spectrum position, also its lobbying against a private C- Band auction (Satellite operators owned mid-band spectrum) who will favour big-pocketed operators only (Namely Verizon and AT&T)  Verizon has (wrongly ?) bet on mmWave and now needs to expand its 5G network via mid- band spectrum for dense and very dense areas, yet cannot acquire any telecoms operators due to anti-trust concerns  AT&T face the same dilemma and needs to get mid-band spectrum, it cannot scoop a telecoms operators in order to get spectrum yet could swap DirecTV for Dish mid-band spectrum  Dish has swaths of spectrum, yet did put it to use it so far, albeit having an obligation to deploy a network by March 2020
  5. 5. 5 The T-Mobile-Sprint merger is facing 50/50% odds depending on DoJ possible remedies, both outcomes do impact the US mobile market structure as well as market competitive dynamics Merger goes through Merger plan falls apart 1 2 T-Mobile / Sprint merger The new T-Mobile sells Boost & some spectrum to Amazon that will partner with Dish to build a new mobile network and enriches its AWS offering by extending the network capabilities of its cloud offering (Edge computing) and creating a new wholesale business The new T-Mobile sells Boost, some spectrum and a part of Sprint’s network to Dish that can:  Operate as a mobile operator while upgrading former Sprint’s network  Deploy a telecoms infrastructure and spin-off the business  Bundle Boost and its spectrum and reselling it to a 3rd party that will invest on infrastructure 3 4 Sprint is partially or entirely acquired by another company & serves as the foundation of a new wholesale B2B business for the acquiring company Sprint sells a chunk of its spectrum holdings to another company in order to raise money to update its network 5 6 T-Mobile sells a stake to Dish: spectrum in exchange for shares Dish leases a part or its entire spectrum holdings to T-Mobile 7 T-Mobile tries to lobby the FCC in order to get better buying conditions for new spectrum auctions NEW NEW For Sprint For T-Mobile
  6. 6. 6 2-step approach Merger goes through as DoJ requires "acceptable" spectrum and business remedies T-Mobile & Sprint do accept DoJ remedies and sells Boost mobile business, some spectrum holdings and a chunk of former Sprint’s network (Boost is a prepaid business and is not considered as a key asset for the new T-Mobile combination) A third party finds these divested assets complementary to its ongoing activities and is willing to purchase them. 1 2 Deal type Participants Details Rationale M&A Dish acquires assets sold by the New T-Mobile  The new T-Mobile sells Boost, some spectrum holdings and a significant chunk of Sprint’s former network to Dish + new T-Mobile or Dish sells spectrum holdings to Verizon  Prerequisite : T-Mobile agrees to selling Sprint network beforehand for a significant price, reducing Sprint’s acquisition cost  If T-Mobile doesn’t sell part of Sprint’s network, Dish enters a temporary MVNO agreement with T-Mobile before building a network before March 2020  T-Mobile & Sprint sell Boost since T-Mobile has already shifted most of its prepaid client base to postpaid  Dish continues to enrich its spectrum holdings & Verizon gets the spectrum it needs to maintain network quality, while New T-Mobile meets DoJ requirements for a merger  Dish either gets a ready to use network or either has a business model justifying building a new network (Wholesale + traditional MNO)  The new T-Mobile sells Boost and some spectrum holdings to Dish  Dish deploys and operates its own network using some of its spectrum. This new operator gets spun off or is sold to a third party  Dish keeps some unused spectrum which is ultimately sold  Boost becomes the new 4th mobile operator using Dish’s new network and provides wholesale services to cable operators. This new entity becomes ultimately a spin-off of Dish and could be purchased by a consortium of cable operators.  By doing so, Dish increases overall spectrum scarcity and is able to sell its remaining spectrum at a price premium  The new T Mobile sells Boost & some spectrum to Dish  Dish repackages Boost and its spectrum and resells it to Amazon that build its own network  Dish monetizes its spectrum either directly by selling it, or indirectly by selling its shares in the new JV  Amazon would be able to cross-sell its customers with mobile services and would be able to put forward its content in a context of diminishing net neutrality  Amazon can enter the market with competitive offers in order to build its market share, these offers could be bundled to Amazon prime  Amazon enriches its enterprise offering by extending the network capabilities of its cloud offerings (Edge computing) and creating a new wholesale business M&A + Alliance Amazon acquires assets sold by the New T-Mobile  The new T-Mobile sells Boost & some spectrum to Amazon  Amazon either buys Dish’s spectrum or creates a new JV with Dish dedicated to build and operate a new mobile network NEW NEW NEW Merger goes through NEW
  7. 7. 7 Failure reasons Merger falls through: T-Mobile deems DoJ remedies too high a price for Sprint (1/2) Too many concessions requested by DoJ: required spectrum & network divesture is deemed too important… …outweighing Sprint substantial restructuring and investments required in order to turn the business around… As Sprint, T-Mobile share the same client pool, T-Mobile already poached Sprint’s high value customers and doesn’t need to acquire Sprint low- value customers 1 2 3 Deal type Participants Details Rationale M&A Sprint is acquired either entirely or partially by another company Full-blown acquisition of Sprint by Dish and business spin-off including Dish & Sprint spectrum holdings in order to sell it to another company for a premium value  Dish would avoid having to build a new mobile network from scratch  Dish makes a significant premium by reselling its new combined spectrum holdings Full-blown acquisition of Sprint by a cable company or a consortium of cable companies  Would allow cable companies to launch a mobile business with convergent offers in dense areas on their footprint, and providing nation-wide wholesale services in areas where they don’t Full acquisition of Sprint by Amazon or partial acquisition in exchange for access to Sprint upgraded network  Amazon would be able to cross-sell its customers with mobile services and would be able to put forward its content in a context of diminishing net neutrality  Amazon enriches its enterprise offering by extending the network capabilities of its cloud offerings (Edge computing) and creating a new wholesale business  Sprint finances its network upgrade & creates a new enterprise business (Wholesale) open to new players and is no longer 100% dependent on its ailing B2C business Spectrum sale Sprint sells a Chunk of its spectrum holdings Sale of a chunk of Sprint’s spectrum portfolio to other mobile operators or a tech company willing to enter the telecoms market  Sprint could finance for its network investment  AT&T and/or Verizon could scoop spectrum holdings in order to enhance their mid band spectrum holdings for their nation-wide 5G networks Future buyer Merger plan falls apart
  8. 8. 8 Merger falls through: T-Mobile deems DoJ remedies too high a price for Sprint (2/2) Deal type Participants Details Rationale M&A T-Mobile sells a stake to Dish: spectrum in exchange for shares Asset swap : Dish sells its spectrum in exchange for shares of T-Mobile, turning Dish into the new main shareholder along Deutsche Telekom  Dish becomes the new T-Mobile main shareholder. Dish can monetize its spectrum holdings and generate value trough a well managed subsidiary  Dish no longer needs to deploy a new mobile from scratch network by March 2020  T-Mobile gets new mid-band spectrum, allowing it to deploy a nation-wide 5G network in order to remain in the 5G game Alliance Dish leases its spectrum to T- Mobile Leasing of Dish spectrum to T-Mobile for financial payments  Would allow Dish to monetize its spectrum holdings while removing its network deployment obligations  T-Mobile gets hold of the mid-band spectrum it needs it order to deploy its nation-wide 5G network Lobbying T-Mobile lobbies the FCC to get better conditions to acquire new spectrum Intense lobbying toward FCC in order to facilitate new spectrum acquisition (C-Band Alliance & CBRS spectrum in particular)  Would allow T-Mobile to solve its mid band spectrum crunch issue at a reasonable cost  Yet seems unlikely to be successful Merger plan falls apart Failure reasons Too many concessions requested by DoJ: required spectrum & network divesture is deemed too important… …outweighing Sprint substantial restructuring and investments required in order to turn the business around… As Sprint, T-Mobile share the same client pool, T-Mobile already poached Sprint’s high value customers and doesn’t need to acquire Sprint low- value customers 1 2 3

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