BARCELONA — The wireless industry was almost treated to news of another major carrier acquisition this week, but the would-be suitor’s board of directors walked away from the deal at the final hour, according toThe Wall Street Journal. Sprint CEO Dan Hesse presented his board with a plan to acquire MetroPCS for up to $8 billion, but the board balked, ending a deal that had been in the works for several months.
Perhaps it was the fear of announcing a major deal during a mobile trade show — in retrospect, something that didn’t turn out so well for AT&T after it announced plans to acquire T-Mobile USA almost a year ago — but I think the board will eventually be vindicated for having avoided another catastrophe.
On the face of it, the deal does make some sense. Sprint would have acquired a carrier that is growing with 9.34 million customers on its rolls at the end of 2011. Assuming it paid the full $8 billion to acquire MetroPCS, Sprint could have acquired each of those customers for about $856 a pop.
MetroPCS’ latest ARPU (average revenue per user) of $40.55 pales in comparison to Sprint’s postpaid ARPU of $58.59. But it’s well above Sprint’s prepaid ARPU (a better comparison, considering MetroPCS is exclusively prepaid) which declined to $26.62 in the last quarter.
Now put that in contrast with AT&T’s failed $39 billion takeover of T-Mobile USA. AT&T would have acquired 33.2 million customers for about $1,175 each, but it would also have assumed ownership of a carrier that is hemorrhaging customers (526,000 fled in the last quarter). AT&T’s financials also would have taken a hit when it eventually blended its postpaid subscriber ARPU of $63.76 with T-Mobile’s latest ARPU of $46.
Considering those numbers, Sprint’s shot at acquiring MetroPCS looks like a better bargain than AT&T’s pursuit of T-Mobile. It could have been too, but what works for one carrier doesn’t always work for another.
Sprint has a horrible track record when it comes to deals of this size and that surely must have weighed on the nine other directors that sit on its board with Hesse. Remember the $35 billion Sprint spent to acquire Nextel in 2005? That deal is now routinely cited as one of the worst mergers in history.
And then there’s Clearwire, which Sprint bought into big time, beginning with a contribution of spectrum and WiMAX-related assets valued at $7.4 billion in late 2008. Sprint has been a majority owner in Clearwire ever since and that has forced the carrier to repeatedly choose between letting Clearwire fall into bankruptcy or double down on its bet with more funding. Not much of a choice at all, considering the massive investment Sprint has riding on the line. So, Sprint coughed up $1.18 billion in cash to keep the company afloat in late 2009 and it had to throw down another $1.6 billion two months ago, hinting at further 10-figure commitments down the road.
Sprint is already overburdened by overhead costs and continues to rack up more debt to keep Clearwire afloat and support its hodgepodge of cellular technologies operating on disjointed spectrum. The carrier is also in the throws of a $7 billion network-wide upgrade that it aims to complete by 2014.
Ultimately, Sprint’s board of directors made the right call in spurning this multi-billion-dollar deal. It would have increased Sprint’s customer base by about 17%, but also would have brought on a headache of migraine portions related to spectrum and cellular technologies. Sprint needs spectrum almost as badly as it needs customers, but it doesn’t need four different bands of it with three 4G technologies running all over the place.
Sometimes the best answer is no, and in this case Sprint got it right.