Wireless consolidation by AT&T, T-Mobile risky
A merging of two incompatible networks would only lead to overhead expenses for the larger carriers.
In the latest speculation, we have a Reuters report claiming that AT&T and Leap Wireless (LEAP) have held merger talks in the past few months. This comes on the back of a Bloomberg article that linked T-Mobile and MetroPCS (PCS) in another acquisition rumor early last week. While the spectrum crunch situation and increasing demand for data services does call for industry consolidation, the deals proposed by the media make little sense.
AT&T and T-Mobile are both GSM players, unlike the smaller CDMA players MetroPCS and Leap. Mergers and acquisitions are all about creating synergies and benefiting from economies of scale. However, merging two incompatible networks would lead to neither and will further increase overhead expenses for the larger carriers.
If AT&T and T-Mobile go ahead with the acquisitions, not only will they have to offer separate handset portfolios but will also need to maintain different networks. We have already seen how that worked out for Sprint, which is now shutting down the iDen network that it had acquired from Nextel after losing subscribers for many years.
The only reason that AT&T and T-Mobile might even be remotely interested in these deals is the additional spectrum they might get for their respective LTE rollouts. They also need the spectrum to meet the growing demand for data services with higher speeds and congestion-free networks from an increasing base of smartphone subscribers. Moreover, with regulators maintaining a hawkish stance over any large-scale acquisition, it is more prudent for carriers to go after smaller players in the industry.
Deals highlight wireless plight
Both Leap and MetroPCS are regional level players and have small spectrum holdings in mostly mid-sized markets across the U.S. They have market caps of $450 million and $2.6 billion, in addition to net debt levels of $2.6 billion and $2.5 billion, respectively.
What this essentially means is that AT&T and T-Mobile will get only a small amount of additional LTE spectrum and an incompatible CDMA network for more than $3 billion and $5 billion, respectively (without considering the market premium for the deals to take place), making the rumored deals highly improbable.
But if the talks are for real and the national carriers are indeed willing to go for the risky deals, it highlights the huge growth challenges that the increasingly saturated wireless industry is currently facing.
We believe the FCC needs to take cognizance of these issues by finding a way of bringing the wireless spectrum hoarded by the cable companies back into play through the Verizon-cable deal. (see The Verizon-Cable Deal Will Go Through Despite FCC Delays)
More from Trefis:
Let's say that ATT is at 80% capacity of 100MHz of spectrum, and decides to buy LEAP and its 10MHz of spectrum. However, LEAP is also currently using 80% of its spectrum. So unless ATT decides to dump all of LEAPs customers onto another carrier, it would only be picking up 2MHz in this example. That 2MHz was not enough for LEAP to meet's its current customer's future demands, so how will ATT take advantage of this merger?
Copyright © 2014 Microsoft. All rights reserved.
The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.