T-Mobile Buying Roaming Partner SunCom for $2.4 Billion
T-Mobile joined other majors’ rural acquisition party, scooping up SunCom Wireless for $2.4 billion in cash and assumed debt. The price is largely on a par with the recent acquisitions of Dobson Cellular by AT&T and Rural Cellular by Verizon. Rural acquisitions have picked up, but analysts disagreed over whether more are on the way.
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The deal improves T-Mobile coverage in the southeastern states. “It will round out our domestic footprint, allowing us to serve 98 of the top 100 markets, and will significantly benefit our financial position by reducing roaming expense,” said Robert Dotson, CEO of T-Mobile USA. The carrier expects $1 billion in benefits through reduced roaming and operating costs, plus growth in acquired markets, it said. SunCom, in a roaming agreement with T-Mobile since 2004, owns GSM/GPRS/EDGE networks in North and South Carolina, Tennessee, Georgia, Puerto Rico and the U.S. Virgin Islands. The deal helps T-Mobile further its strategy to “grow abroad with mobile,” said Rene Obermann, board chairman of T- Mobile’s parent, Deutsche Telekom.
Both companies’s boards approved the deal, expected to close in the first half of 2008. It awaits shareholder and regulatory approval.
Getting regulatory approval won’t be hard since T-Mobile and SunCom have “virtually no overlapping networks,” Nelson said. T-Mobile and SunCom are both GSM carriers, enhancing chances for easy technical integration, said Current Analysis’ William Ho. The only issue could be differing wireless plans, he said. SunCom offers unlimited prepaid calling, competing with Leap Wireless in South Carolina, while T-Mobile sells limited minutes in large chunks, he said. T-Mobile must decide whether killing the unlimited plan would hurt its ability to compete with Leap in the market, he said.
The deal isn’t surprising on either side, analysts said Monday. “Suncom has been losing money for many quarters and has been actively looking for buyers,” Ho said. Meanwhile, T-Mobile lacks a network in much of SunCom’s territory, Nelson said. At the end of Q2, SunCom had $242.5 million revenue and more than 1.1 million subscribers.
The deal is on the high end of pricing, comparing SunCom’s earnings with those of other rural companies, said Stanford Group analyst Michael Nelson. SunCom’s $2.4 billion sale represents 12.9 times 2007 earnings estimates; Verizon paid 10.5 times for Rural and AT&T paid 9.9 times for Dobson, Nelson said.
Still, the SunCom deal reflects “significant synergy potential” for T-Mobile, Nelson said. SunCom should bring $85 million in 2007 roaming revenue, most of it from T- Mobile, he said. T-Mobile may save money if it can reduce SunCom’s “inflated cost structure,” Nelson said, noting that SunCom runs a “very inefficient network” with high back office, acquisition and handset costs. Imposing T-Mobile’s stronger business model should straighten out SunCom’s problems, he said.
Major carriers’ acquisition of regional roaming partners is heating up, UBS said in a note. “We expect national carriers to continue to acquire strategic roaming partners and believe AT&T will continue to roll up regional GSM providers,” he said. Nelson disagreed, calling the SunCom buy a “one-off” for T-Mobile and expressing doubt that the other majors would make many more moves either. SunCom “is one of the last remaining properties out there,” he said.