JOHN LEGERE, the lion-maned boss of T-Mobile, made his wireless firm the fastest-growing carrier in America by cutting prices and giving customers better deals than AT&T and Verizon, which he relentlessly mocked on Twitter as retrograde behemoths. His personal brand as an industry maverick may have helped too. On April 29th he put that image to the test, agreeing to a combination with Sprint, the next largest carrier after T-Mobile, and creating a behemoth under his leadership.
The deal, all in shares, values the combined entity at $146bn including debt. If approved by regulators, it would squeeze the number of providers in the wireless market in America from four to three. That is a big “if”—twice earlier this decade, antitrust authorities have either stepped in to prevent such an outcome or indicated that they would do so, for fear of higher prices for consumers.
Mr Legere presumably knows the challenge, so he appealed to the political priorities of President Donald Trump. First came a promise that the union with Sprint would add thousands of jobs in America (despite also promising shareholders $6bn of annual savings, mostly cost cuts). Second, he pledged that the two firms would spend $40bn within three years to build a national 5G mobile broadband network much more quickly than either Verizon or AT&T, by taking advantage of a combination of their spectrum assets. Mr Trump’s administration has made it clear that it covets early development of a 5G network, to stop China winning the battle over the technology. In addition, “Trump-led tax reform” was “particularly helpful” to the deal’s economics, cooed Mr Legere. Investors, worried that Mr Trump’s Department of Justice will not be so easily charmed, sold shares in both companies.
The deal represents a big retreat for Masayoshi Son, boss of SoftBank, which owns 85% of Sprint. Mr Son engineered a $20bn takeover of Sprint in 2013, with the aim of merging it with T-Mobile, but badly misjudged the regulatory mood. Twice he tried and failed to merge Sprint with T-Mobile and put Sprint in charge. Instead Sprint gave up its third-place position in the wireless market while consistently losing money, raising the spectre of bankruptcy.
Calling the deal a merger seems a face-saving gesture for Mr Son. The new company will be called T-Mobile, Mr Legere will run it and Deutsche Telekom, its parent firm, will own a plurality of shares. But SoftBank won better terms than analysts expected, getting 27% of the new company and four board seats, including one for Mr Son. He will be able to switch attention from Sprint to his new $100bn Vision Fund, a giant technology fund.
The two companies argue, with some support from analysts, that telecommunications companies increasingly need massive scale to succeed. AT&T and Verizon have more combined market share now than they did five years ago, at about 70%. (T-Mobile, with 16%, has gained market share mostly from Sprint, which has 12%.) AT&T is trying to buy Time Warner, pending a regulatory challenge (see article), in part to better lock in customers. Both AT&T and Verizon are investing in 5G. Mr Legere and Marcelo Claure, the boss of Sprint (pictured above), say that only by joining up can T-Mobile and Sprint compete against the larger firms.
Their claims about 5G do contain some truth. Combined, the two companies own enough spectrum to cover much of the country with a far zippier network than either has now, though not at the fastest speeds promised with 5G. “Sprint is bringing some serious spectrum assets that T-Mobile doesn’t have and really needs badly for 5G,” says Stéphane Téral of IHS Markit, a provider of market and financial data.
The new T-Mobile would be better and stronger, analysts say, but its prices would probably not be lower. Projections from T-Mobile and Sprint of sharply higher profit margins for the merged firm suggest another priority.
In 2011 regulators blocked an acquisition of T-Mobile by AT&T, and in 2014 they indicated to T-Mobile and Sprint that they believed the market still needed four carriers. Customers have benefited: monthly wireless bills for urban consumers have fallen by 20% since 2011 (see chart). Mr Legere’s success at T-Mobile, in fact, could be the merger’s undoing. T-Mobile appeared on the verge of collapse in late 2011 when regulators blocked the AT&T acquisition. Since 2013 it has thrived, adding 40m customers by getting rid of long-term contracts, reducing prices and offering unlimited data usage. Craig Moffett of MoffettNathanson writes that the justice department “undoubtedly feels vindicated by its 2011 decision”. He gives the merger a 50-50 chance of approval.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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