If T-Mobile US (TMUS) is in the catbird seat — able to take its pick of potential merger partners or walk away from any deal it chooses — that raises the question of how it got there.
The answer is simple. It has outsmarted and outperformed the other three national wireless service providers — AT&T (T), Verizon Communications (VZ) and Sprint (S) — over the past four years.
"T-Mobile's continued growth in the face of the industry's struggles ensures that T-Mobile will be the belle of the M&A ball," said Craig Moffett, an analyst at Moffett Nathanson.
T-Mobile's success is due largely to its relentless "Uncarrier"-branded marketing campaign and price discounts. T-Mobile also upgraded its wireless network, closing the performance gap with Verizon, whose advertising for years has touted its top-rated network.
In the March 2017 quarter, T-Mobile revenue climbed 11% to $9.6 billion, while wireless revenue at AT&T fell 4.4% to $17.2 billion and Verizon's slid 5% to $20.8 billion. T-Mobile added 798,000 postpaid phone subscribers — the highest-spending ones in the industry — while Verizon lost 289,000 and AT&T shed 348,000. Sprint has yet to report.
It's gotten to the point where Germany's Deutsche Telekom (DTEGY), which owns T-Mobile, may no longer be interested in exiting the U.S.
Free To Hook Up
With a government auction of radio spectrum owned by local TV broadcasters completed, telecom companies are again free to engage in strategic talks. Regulators banned negotiations among bidders during a quiet period that ended April 27.
Moffett says that T-Mobile can explore a merger with Sprint, satellite broadcaster Dish Network (DISH) or a cable TV company. More important, it can keep its options open.
"They are arguably the only company that can make a credible case that remaining independent is a viable option," Moffett said in a report. "Any negotiator worth their salt will say that the most important success factor in any negotiation is having the option of saying no and walking away. T-Mobile has that."
T-Mobile won the lion's share of airwaves in the spectrum auction, spending $8 billion to capture 31 megahertz of low-band airwaves. Dish was close behind, spending $6.2 billion to buy 18 MHz of spectrum on average nationally.
While Dish looms as a strategic or merger partner, T-Mobile now has enough of its own spectrum to stay independent, analysts say. T-Mobile says it can match or better the wireless data speeds of Verizon and AT&T.
Unlimited Data Capacity
T-Mobile also has enough spectrum to continue offering unlimited data services to subscribers, analysts say. AT&T and Verizon in the March quarter reintroduced unlimited data plans in the March quarter to combat market-share gains by T-Mobile and Sprint. T-Mobile slashed prices on its unlimited data plans in August.
The payback has been big, analysts say. T-Mobile ended the March 2017 quarter with 55.5 million branded customers, more than double the 26.1 million branded subscribers it had just four years earlier.
In 2017, T-Mobile has forecast branded postpaid subscriber additions in the range of 2.8 million to 3.5 million.
"T-Mobile's promotions have been highly successful and show no signs of slowing down," said Jim Breen, an analyst at William Blair. "We expect the carrier to continue to gain share from the rest of the industry."
More Stores
T-Mobile has been expanding its number of U.S. stores, including those of prepaid brand MetroPCS, to outdo AT&T and Verizon on the retail front.
In the first quarter, T-Mobile reported positive free cash flow of $185 million vs. a negative $310 million a year earlier. T-Mobile has forecast free-cash-flow growth from $1.4 billion in 2016 to about $4.5 billion in 2019.
IBD'S TAKE: T-Mobile shares broke out of flat base on April 24 and have been rising ever since. The wireless carrier now has the No. 1 ranking among stocks in IBD's Telecom Services-Wireless Group, with a Composite Rating of 97 out of a possible 99.
T-Mobile stock hit new all-time highs after it reported first-quarter earnings that topped expectations. And its stock has shot up 750% since mid-2012.
Parent Deutsche Telekom almost cashed out in 2011. The German phone company agreed to sell T-Mobile to AT&T for $39 billion, but federal regulators opposed the deal. T-Mobile gained $4 billion in cash and radio spectrum in breakup fees — helping to fund a rebound.
Japan-based Softbank in October 2012 bought a controlling stake in struggling Sprint. Softbank CEO Masayoshi Son pursued a Sprint merger with T-Mobile, but the Obama administration made it clear that it wanted a U.S. wireless market with four national players. A Sprint merger with T-Mobile would create a three-player market, including Verizon and AT&T.
Softbank and Deutsche Telekom shelved Sprint-T-Mobile merger talks in mid-2014.
Help From Trump
Shares in Sprint and T-Mobile jumped in November after Republican Donald Trump's election as president on views that a merger could be approved. But some analysts say the Department of Justice could still block a deal, saying consumers are benefiting from an ongoing price war. And the Department of Justice may want to preserve T-Mobile's status as a maverick in the industry.
Son in February said that he would be willing to let Deutsche Telekom hold a controlling stake if T-Mobile and debt-laden Sprint combined.
Many suitors have been proposed for a T-Mobile marriage. Comcast, the nation's biggest cable TV firm, could afford T-Mobile but maybe not much bigger Verizon, analysts say. Comcast, though, seems leery of pushing into wireless amid an industry price war.
"We expect M&A chatter to pick up, and we expect T-Mobile and Deutsche Telekom to play a key role — as either a seller or a buyer," said Jennifer Fritzsche, a Wells Fargo analyst, in a report.
While putting a big deal on hold, there's speculation that T-Mobile could buy a smaller, regional carrier, such as United States Cellular (USM), to expand into rural areas.
T-Mobile CEO John Legere, on the company's April 25 earnings call, discussed some of the possibilities.
"I think Dish has access to good content and spectrum," Legere said. "I think Sprint has an awful lot of scale and a good customer base and something that would be interesting to take a look at."
He emphasized that T-Mobile is not under pressure to pull off a deal.
"The inorganic and organic possibilities for the company are tremendous," he added. "And, it's great to enter this kind of period not from a hostage standpoint. But we are interested in looking at some of the possibilities."
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