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Muse CenturyLink-T-Mobile-Sprint Combo

January, 2019

Why would Sunit Patel, who has been the loyal enabler of Level 3, particularly with his expertise in debt refinancing, now part of CenturyLink, be in such a rush to leave his prestigious position, along with overseeing a tremendous opportunity for growth, to join a pending merger of two wireless operators, which is destined to struggle over capital and resources for an unlimited amount of time? How could CenturyLink fail to make him an offer he could not refuse, so to speak? If Deutsche Telekom, a majority shareholder of T-Mobile, has not exactly been as willing to finance projects outside of Europe as inside the continent, why would Patel expect it do so now for an operator in the US, which will be hard-pressed to become even a niche player in 5G, at best, and a company that could conceivably declare bankruptcy, at worst? Why would he find it so exciting just to work on merging with Sprint, a firm, which tends to bring headaches to the table, including two disparate networks and very little fiber. There has to be more to the story, and part of it is that we understand that CenturyLink has been contemplating going beyond the landline game. fibeReality believes that with AT&T’s concentration on the higher margin-generating entertainment business, and that with our expectations that consumer broadband networking will become even more dominated by the MSOs (including their initial, limited forays directly into wireless), that CenturyLink (with its assets, both deployed and as a dark fiber provider) could become the true second, nationwide, 5G competitor to Verizon, assuming a deal could be reached with T-Mobile and Sprint.

In such a scenario, the safe betting is that Verizon would remain by far the dominant 5G operator. Both corporations would benefit from the lack of pricing pressures inherent to a duopoly. One would not think that antitrust concerns would be a big issue, at least with the current administration, in that each of the incumbent ISPs, would have a major wireless operation.

As any type of 5G player, T-Mobile/Sprint also would ultimately have no choice, but as a bare minimum, merge with an entity that has a sufficient amount of wealth to even lease dark fiber to support its infrastructure. Certainly, an MSO, like Comcast cannot be ruled out, but it would pale in comparison to CenturyLink in terms of both fiber availability, along with experience in going after the large enterprises, which we have argued for a while, is at the heart of the business case for the next-generation of wireless services.

Now, Patel’s action, in the context of a potential three-way merger, would make all of the sense in the world. The combination would become intriguing in widening the canvas, with him playing an instrumental role in combining a tier 1 ISP, with an eventual strong, number-three wireless competitor, but with an integration effort, which is most beneficial to CenturyLink. Thus, Patel could be more aggressive in dismantling the least attractive business portions at T-Mobile, and at least, indirectly at Sprint, separately, than would be the case, if it was only a marriage between the two wireless concerns. (T-Mobile is leading the way on designing the 5G architecture anyway, not Sprint.)

Of course, the other advantage for CenturyLink is that he knows the corporate structure as a whole very well. Usually, what happens with any M&A activity is that the buyer cannot fully look under the hood, until the deal is closed, and there are inevitable surprises. Patel would be able to keep any shocks at CenturyLink to a minimum after closing the transaction, and then, would obviously assume a high-level position at the entity he just left.

As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]

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