Editorials

Telecom deal would help and challenge Son

Entrepreneur Masayoshi Son is hailed as a visionary and deal-maker whose focus is on the landscape centuries ahead, not merely the next quarterly report. That reputation is taking a hit following news that his U.S. telecommunications company Sprint will be purchased by T-Mobile. It is both good news and bad for Son: While he will lose control of his marquee U.S. investment, the deal — if approved — will loosen financial constraints on Son’s other businesses.

Son is Japan’s richest person, despite having reportedly lost more than three times his current wealth during the dot.com crash of 2000. He made his fortune with SoftBank, the software company, and shrewd investments — including an initial $20 million stake in Alibaba that is now a 30 percent stake in that $440 billion company — have turned it into the 38th-largest publicly traded company in the world and the fourth-largest in Japan.

One of Son’s most important deals was his 2012 purchase of a 70 percent stake in the U.S. telecommunications company Sprint Nextel. He hoped to turn around the company, which had a reputation for poor service, a task that was made harder by the indelibility of some memories and his own debt burden, which prevented investments needed to fix Sprint networks.

Deciding that scale was the answer to Sprint’s problems, Son in 2014 initiated merger talks with T-Mobile, the third-largest U.S. telecommunications provider. (Sprint is No. 4.) Twice, those negotiations failed — the last time late last year — as Son walked away, unhappy with a deal that would cost him majority control of the new entity.

The third time, however, he relented, agreeing to a deal that would surrender his control. The agreement will give Deutsche Telekom, T-Mobile’s owner, a 42 percent stake in the new company and control of its board. SoftBank will have a 27 percent stake and get about $26.5 billion in shares in the new $140 billion company. It will operate under the T-Mobile name and John Legere, T-Mobile’s current CEO. will head the business. Son will get about one-third of seats on the new board and, significantly, the new company will assume Sprint’s $32 billion in debt.

The deal will significantly increase the number of subscribers to the new company. Analysts applaud the agreement for allowing the two companies to reduce costs: Reducing overhead redundancies, competition between retail locations and duplicative cell towers is estimated to save more than $6 billion annually. The heads of both Sprint and T-Mobile said the deal was most valuable for giving them the scale to build out a fifth-generation (5G) mobile network, which is now considered the holy grail for the industry. Legere has said that he anticipates that within three years, his network will have 30 times more capacity than T-Mobile does today.

The deal is by no means done, however. Combining the country’s third- and fourth-largest telecommunications providers is a marked change in the market and will undergo strict scrutiny by regulators. In 2011, AT&T’s attempt to buy T-Mobile was blocked on anti-competitive grounds. A previous merger between T-Mobile and Sprint was also blocked in 2014 by the Obama administration over similar concerns.

Ironically, that history could work to this deal’s advantage. U.S. President Donald Trump’s reflexive antipathy toward anything his predecessor did could tempt him to urge regulators to think differently about this agreement. Legere has also helped his cause by promoting the deal as capable of creating tens of thousands of jobs in rural America.

Son too has forged a relationship with the U.S. president in ways that could help his cause. Shortly after Trump won the November 2016 election, Son visited him in New York and promised to invest $50 billion in the U.S. and create 50,000 jobs, a promise that Trump trumpeted as proof of his acumen and the newfound respect for the United States. A successful merger and the resulting job creation — in the rural areas that constitute Trump’s base — will reinforce Son’s positive image and, by extension, that of Japan.

Son will benefit too from a reduced debt load. SoftBank’s debt now totals an estimated ¥15.8 trillion. Son insists that it is manageable and he is no doubt thinking of plans to reduce that amount by taking SoftBank’s Japanese mobile phone unit public later this year. But as interest rates begin to climb — the U.S. Federal Reserve Board has signaled that it plans to raise rates three times this year — appetite for SoftBank holdings and offerings is likely to wane. This new environment will test Son’s vision and resources — along with that of many other entrepreneurs who have flourished in recent years of low interest rates.