(Reuters) – T-Mobile US Inc (TMUS.O) and Sprint Corp (S.N) said on Sunday they had agreed to a $26 billion all-stock deal and believed they could win over skeptical regulators because the merger would create thousands of jobs and help the United States beat China to creating the next generation mobile network.
The agreement caps four years of on- and off- talks between the third and fourth largest U.S. wireless carriers, setting the stage for the creation of a company with 127 million customers that will be a more formidable competitor to the No.1 and No.2 wireless players, Verizon Communications Inc (VZ.N) and AT&T Inc (T.N).
U.S. regulators, which have challenged in court AT&T’s $85 billion deal to buy U.S. media company Time Warner Inc (TWX.N), are expected to grill Sprint and T-Mobile on how they will price their combined wireless offerings.
Sprint’s and T-Mobile’s first round of merger talks ended unsuccessfully in 2014 after U.S. President Barack Obama’s administration expressed antitrust concerns.
The new deal will create the highest capacity U.S. network, lower prices, create jobs and improve service in rural areas, said John Legere, the current chief executive of T-Mobile and the new head of the proposed combined company.
The combined company, which will be called T-Mobile, will invest $40 billion over the next three years to upgrade its networks to accommodate the next generation 5G wireless technology, which is expected to have the speeds necessary to power drones and self-driving cars, Legere said.
T-Mobile and Sprint said they expected to complete their deal no later than the first half of 2019, an ambitious goal given the intense U.S. regulatory scrutiny it will be subjected to. T-Mobile will not be liable to pay Sprint a breakup fee should regulators block the deal, according to sources who asked not to be identified because that detail in their contract has not yet been made public.
The companies said they expect U.S. regulators would see the benefits of the deal.
“This isn’t a case of going from four to three wireless companies – there are now at least seven or eight big competitors in this converging market,” Legere said in a statement. Other companies also would be forced to accelerate their investments in the face of a combined T-Mobile-Sprint, the companies added.
CTIA, a trade organization that represents the U.S. wireless communications industry, ranks the United States behind China and South Korea in 5G readiness.
A spokeswoman for Federal Communications Commission Chairman Ajit Pai declined to comment on Sunday on the proposed merger. The FCC will decide whether to grant the deal regulatory approval and if deal is in the “public interest.”
Legere said the deal would likely lead to lower prices for competitors, including AT&T and Verizon, as well as Comcast Corp (CMCSA.O).
AT&T declined to comment. Comcast could not immediately be reached for comment.
Verizon declined to comment on prices but said it remains committed to building a 5G network.
The breakthrough in the companies’ negotiations, first reported by Reuters on Thursday, came after T-Mobile majority-owner Deutsche Telekom AG (DTEGn.DE) and Japan’s SoftBank Group Corp (9984.T), which controls Sprint, agreed on a structure that will allow Deutsche Telekom to continue to consolidate the combined company, which will have a market value of over $80 billion, on its books.
Deutsche Telekom will own 42 percent of the combined company, and will control the board of the combined company, nominating nine of the 14 directors. Legere will also serve as a director.
The implied equity valuation for Sprint is $6.62 per share based on T-Mobile’s closing share price on Friday. Sprint shares closed Friday at $6.50.
The all-stock transaction is at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each T-Mobile US share.
Tokyo-based SoftBank and Deutsche Telekom will sign a voting rights agreement that will give Deutsche Telekom access to voting rights for a total of 69 percent of T-Mobile shares.
The second round of talks between Sprint and T-Mobile ended in November over valuation disagreements.
Since then, Sprint’s shares lost about a fifth of their value amid questions about how the company can compete effectively under the weight of its long-term debt of more than $32 billion.
INVESTING IN 5G TECHNOLOGY
Even though Sprint’s customer base has expanded under CEO Marcelo Claure, growth has been driven by discounting. Analysts say that, without T-Mobile, Sprint lacks the scale needed to invest in its network and to compete in a saturated market.
T-Mobile has fared better than Sprint, even if it remains a distant third to Verizon and AT&T. It has managed to score sustained market share gains, as innovative offerings, improving network performance and good customer service attract new customers, according to Moody’s Investors Service Inc.
T-Mobile became the first major U.S. carrier to eliminate two-year contracts, a shift quickly embraced by consumers and copied by competitors. The company has also badgered rivals with its unlimited data plans.
Both Sprint and T-Mobile are far behind Verizon and AT&T in upgrading their network to accommodate next generation 5G wireless technology. Even after their merger, the combined company’s budget to invest in 5G will be smaller than Verizon or AT&T’s.
However, Sprint and T-Mobile hope the deal will give them more firepower to participate in auction for spectrum to develop 5G. They plan to participate in a spectrum auction in late fall and will request a waiver if the merger prevents the companies from participating.
Reporting by Greg Roumeliotis, Sheila Dang and Liana B. Baker in New York; Writing by Sheila Dang; Editing by Lisa Shumaker and Peter Henderson