NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
| Note 1. | Basis of Presentation |
The unaudited pro forma condensed combined financial information was prepared in accordance with GAAP and pursuant to SEC Regulation S-X Article 11. T-Mobile’s fiscal year end is December 31 and Sprint’s fiscal year end is March 31. The unaudited pro forma condensed combined balance sheet as of March 31, 2018 combines the historical unaudited condensed consolidated balance sheet of T-Mobile as of March 31, 2018 and historical audited consolidated balance sheet of Sprint as of March 31, 2018, giving effect to (i) the merger transactions as if they had been completed on March 31, 2018 and (ii) the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2018 and the fiscal year ended December 31, 2017 give effect to (i) the merger transactions as if they been completed on January 1, 2017, the beginning of T-Mobile’s most recently completed fiscal year and (ii) the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2018 was prepared using T-Mobile’s historical unaudited condensed consolidated statement of operations for the three months ended March 31, 2018, Sprint’s historical audited consolidated statement of operations for the year ended March 31, 2018, and Sprint’s historical unaudited condensed consolidated statement of operations for the nine months ended December 31, 2017. Sprint’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2018 was derived by subtracting the historical unaudited condensed consolidated statement of operations for the nine months ended December 31, 2017 appearing in Sprint’s Quarterly Report on Form 10-Q filed with the SEC on February 6, 2018 from the audited consolidated statement of operations for the fiscal year ended March 31, 2018 appearing in Sprint’s Annual Report on Form 10-K filed with the SEC on May 24, 2018. Because the difference between T-Mobile’s and Sprint’s fiscal year end dates is less than 93 days, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 was prepared using T-Mobile’s historical audited consolidated statement of operations for the year ended December 31, 2017 and Sprint’s historical audited consolidated statement of operations for the year ended March 31, 2018, as permitted under Rule 11-02 of Regulation S-X. However, given the different fiscal year ends of T-Mobile and Sprint, the Sprint historical unaudited condensed consolidated statement of operations for the three months ended March 31, 2018 has been included in both the fiscal year ended December 31, 2017 and the three months ended March 31, 2018 pro forma condensed combined statements of operations. Sales and net income for Sprint for the three months ended March 31, 2018 were $8,083 million and $69 million, respectively.
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting in accordance with the business combination accounting guidance as provided in FASB ASC Topic 805, Business Combinations, with T-Mobile treated as the accounting acquirer and Sprint as the accounting acquiree. The unaudited pro forma condensed combined financial information may differ from the final purchase accounting for a number of reasons, including the fact that the estimates of fair values of assets and liabilities acquired are preliminary and subject to change when the formal valuation and other studies are finalized. The differences that may occur between the preliminary estimates and the final purchase accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial information.
The historical financial information has been adjusted to give effect to matters that are (i) directly attributable to the merger transactions, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the operating results of the combined company. The unaudited pro forma condensed combined financial information does not give effect to the potential impact of any anticipated synergies, operating efficiencies or cost savings that may result from the merger transactions or of any integration costs.
This unaudited pro forma condensed combined financial information should be read in conjunction with:
| • | the separate historical unaudited condensed consolidated financial statements of T-Mobile as of and for the three months ended March 31, 2018, included in T-Mobile’s Quarterly Report on Form 10-Q filed with the SEC on May 1, 2018; |
| • | the separate historical audited consolidated financial statements of T-Mobile as of and for the year ended December 31, 2017, included in T-Mobile’s Annual Report on Form 10-K filed with the SEC on February 8, 2018, as updated by T-Mobile’s Current Report on Form 8-K filed with the SEC on June 18, 2018; |
| • | the separate historical audited consolidated financial statements of Sprint as of and for the year ended March 31, 2018, included in Sprint’s Annual Report on Form 10-K filed with the SEC on May 24, 2018; |
| • | the separate historical unaudited condensed consolidated financial statements of Sprint for the nine months ended December 31, 2017, included in Sprint’s Quarterly Report on Form 10-Q filed with the SEC on February 6, 2018; and |
| • | the description of Sprint’s ordinary shares issued and outstanding as of April 25, 2018 contained in the business combination agreement, which is attached to this joint consent solicitation statement/prospectus as Annex A. |
| Note 2. | Significant Accounting Policies |
The accounting policies used in the preparation of this unaudited pro forma condensed combined financial information are those set out in T-Mobile’s audited consolidated financial statements as of and for the year ended December 31, 2017 and T-Mobile’s unaudited condensed consolidated financial statements as of and for the quarter ended March 31, 2018, as updated by T-Mobile’s Current Report on Form 8-K filed with the SEC on June 18, 2018. Management has determined that certain adjustments, including the following, are necessary to conform Sprint’s financial statements to the accounting policies used by T-Mobile in the preparation of the unaudited pro forma condensed combined financial information:
| • | Sprint’s non-return expense has been reclassified out of cost of equipment rentals into depreciation expense to align with T-Mobile’s depreciation policy for leased handsets. |
The reclassification amounts are subject to change as further assessment is performed and finalized for purchase accounting. These reclassifications have no effect on previous reported total assets, total liabilities, shareholders’ equity or income from continuing operations of T-Mobile or Sprint.
Certain other reclassifications have also been reflected in the pro forma adjustments to conform Sprint’s presentation to T-Mobile’s in the unaudited pro forma condensed combined balance sheet and statements of operations. Note 4 sets forth additional information about reclassifications and adjustments necessary to conform Sprint’s financial statements to the accounting policies and presentation used by T-Mobile.
T-Mobile is still in the process of evaluating certain pro forma adjustments necessary to conform certain accounting policies of Sprint to those of T-Mobile, particularly as related to the adoption of FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (which we refer to as “the new revenue standard”). T-Mobile adopted the new revenue standard on January 1, 2018, while Sprint adopted the new revenue standard on April 1, 2018. The pro forma condensed combined financial information for the three months ended March 31, 2018 does not include pro forma adjustments to adjust Sprint’s historical financial results for the adoption of the new revenue standard as T-Mobile is still in the process of obtaining the information necessary to determine appropriate conforming adjustments as of the date of this preliminary joint consent solicitation statement/prospectus. These adjustments could have a material impact on the unaudited pro forma condensed combined financial information. T-Mobile expects to have the necessary information in order to reflect pro forma adjustments in the next amendment to this preliminary joint consent solicitation statement/prospectus after Sprint has filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, reflecting the adoption of the new standard.
As part of the application of ASC 805, T-Mobile will conduct a more detailed review of Sprint’s accounting policies in an effort to determine if differences in accounting policies require further reclassification of Sprint’s results of operations or reclassification of assets or liabilities to conform to T-Mobile’s accounting policies and classifications. Therefore, T-Mobile may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on these unaudited pro forma condensed combined financial information. In certain cases, the information necessary to evaluate the differences in accounting policies and the impacts thereof may not be available until after the merger transactions are completed.
| Note 3. | Calculation of Estimated Merger Consideration and Preliminary Purchase Price Allocation of the Transactions |
Estimated Merger Consideration
The fair value of consideration to be transferred upon completion of the merger transactions will include the fair value of T-Mobile common stock to be issued to Sprint stockholders pursuant to the business combination agreement and the fair value of Sprint equity awards assumed for pre-combination service, the fair value of the specified Sprint warrant, and repayment of a portion of Sprint’s debt. The estimated merger consideration is as follows:
| (dollars in millions) | ||||
| Estimated value of T-Mobile common stock to be issued to Sprint stockholders pursuant to the business combination agreement |
$ | 25,021 | (1) | |
| Estimated value of T-Mobile replacement equity awards attributable to precombination service |
190 | (2) | ||
| Estimated value of specified Sprint warrant |
8 | (3) | ||
| Estimated repayment of Sprint’s debt (including accrued interest and prepayment penalties) |
10,631 | (4) | ||
|
|
|
|||
| Preliminary estimated merger consideration |
$ | 35,850 | ||
|
|
|
|||
| (1) | Represents the estimated fair value of T-Mobile common stock to be issued to Sprint stockholders pursuant to the business combination agreement. The estimate is based on 4,006,698,492 shares of Sprint common stock issued and outstanding as of April 25, 2018 and 68,030,781 shares of Sprint common stock reserved for under Sprint’s ESPP, along with options and restricted stock units that are expected to vest by the closing date of the merger transactions, 54,579,924 shares of Sprint common stock for warrants exercised on July 10, 2018, an exchange ratio of 0.10256 shares of T-Mobile common stock per share of Sprint common stock, and the closing price per share of T-Mobile common stock on NASDAQ on July 25, 2018 of $58.83. |
| (2) | Represents the portion of the fair value of stock options, restricted stock units and performance-based restricted stock units attributable to pre-combination services that will be assumed by T-Mobile upon completion of the merger transactions. FASB ASC Topic 805 requires that the fair value of replacement awards attributable to pre-combination service be included in the consideration transferred. |
| (3) | Represents the assumption by T-Mobile of the specified Sprint warrant. |
| (4) | Represents the total estimated cash consideration paid to retire certain Sprint debt, including interest, prepayment penalties, and related consent fees. |
The final estimated merger consideration could significantly differ from the amounts presented in the unaudited pro forma condensed combined financial information due to movements in the price of T-Mobile common stock price up to the closing date of the merger transactions. A sensitivity analysis related to the fluctuation in the price of T-Mobile common stock was performed to assess the impact a hypothetical change of 10% on the volume weighted average trading price of T-Mobile common stock on NASDAQ for the ten consecutive trading days ending on (and including) July 25, 2018 would have on the estimated merger consideration and goodwill as of the closing date of the merger transactions.
The following table shows the change in the price per share of T-Mobile common stock, estimated merger consideration and goodwill:
| Change in Price per Share |
Price per Share of T-Mobile Common Stock |
Estimated Merger Consideration |
Estimated Goodwill | |||||||||
| (dollars in millions, except stock price) | ||||||||||||
| Increase of 10% |
$ | 64.71 | $ | 38,352 | $ | 5,640 | ||||||
| Decrease of 10% |
$ | 52.95 | $ | 33,348 | $ | 636 | ||||||
Preliminary Purchase Price Allocation
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Sprint are recorded at the merger transactions date fair values and added to those of T-Mobile. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the merger transactions. For the preliminary estimate of fair values of assets acquired and liabilities assumed of Sprint, T-Mobile used publicly available benchmarking information as well as a variety of other assumptions, including market participant assumptions. The allocation is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the pro forma purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed, and such differences could be material.
The following table sets forth a preliminary allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed of Sprint using Sprint’s audited consolidated balance sheet as of March 31, 2018, with the excess recorded to goodwill:
| Purchase price allocation |
(dollars in millions) | |||
| Cash and cash equivalents |
$ | 6,266 | ||
| Short-term investments |
2,354 | |||
| Accounts receivable |
2,657 | |||
| Equipment installment plan receivables |
863 | |||
| Accounts receivable from affiliates |
196 | |||
| Inventories |
1,003 | |||
| Other current assets |
422 | |||
| Property and equipment |
14,571 | |||
| Spectrum licenses |
42,000 | |||
| Other intangible assets |
7,157 | |||
| Equipment installment plan receivables due after one year |
150 | |||
| Other assets |
698 | |||
|
|
|
|||
| Total assets |
78,337 | |||
| Accounts payable and accrued liabilities |
(5,635 | ) | ||
| Payable to affiliates |
(95 | ) | ||
| Short-term debt |
(1,106 | ) | ||
| Deferred revenue |
(1,181 | ) | ||
| Other current liabilities |
(108 | ) | ||
| Long-term debt |
(29,745 | ) | ||
| Tower obligations |
(109 | ) | ||
| Deferred tax liabilities |
(5,187 | ) | ||
| Other long-term liabilities |
(2,396 | ) | ||
|
|
|
|||
| Total liabilities |
(45,562 | ) | ||
| Stockholders’ equity attributable to NCI |
(63 | ) | ||
|
|
|
|||
| Net assets acquired (a) |
32,712 | |||
|
|
|
|||
| Estimated merger consideration (b) |
35,850 | |||
|
|
|
|||
| Estimated goodwill (b) - (a) |
$ | 3,138 | ||
|
|
|
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Goodwill represents excess of merger consideration over the fair value of the underlying net assets acquired. In accordance with FASB ASC Topic 350, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is reviewed for impairment at least annually, absent any indicators of impairment. Goodwill is attributable to the assembled workforce of Sprint, planned growth in new markets and synergies expected to be achieved from the combined operations of T-Mobile and Sprint. Goodwill recorded in the merger transactions is not expected to be deductible for tax purposes.
The pro forma historical net assets adjustments as shown above are further described below in Notes 5 and 6.
The deferred tax liabilities represent the deferred tax impact associated with the incremental differences in book and tax basis created from the preliminary purchase price allocation. Deferred taxes associated with estimated fair value adjustments reflect an estimated blended federal and state tax rate, net of tax effects on state valuation allowances. For balance sheet purposes, where U.S. tax rates were used, rates were based on recently enacted U.S. tax law, and for statement of operations purposes, where U.S. tax rates were used, rates were based on the tax laws applicable to the respective periods. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-merger activities, including post-acquisition activities, cash needs, the geographical mix of income and changes in tax law. This determination is preliminary and subject to change based upon the final determination of the fair value of the identifiable intangible assets and liabilities.
Intangible Assets
Preliminary identifiable intangible assets in the unaudited pro forma condensed combined financial information consist of the following:
| Intangible Asset |
Approximate Fair Value | Estimated Useful Life | ||||||
| (dollars in millions) | (in years) | |||||||
| Spectrum licenses |
$ | 42,000 | N/A | |||||
| Trademarks |
1,137 | 1.5-29 | ||||||
| Customer relationships |
5,100 | 9 | ||||||
| Spectrum favorable leases |
685 | 23 | ||||||
| Other intangibles |
235 | 5-10 | ||||||
|
|
|
|||||||
| Total |
$ | 49,157 | ||||||
|
|
|
|||||||
The amortization related to the identifiable intangible assets is reflected as a pro forma adjustment in the unaudited pro forma condensed combined statements of operations based on the estimated useful lives above and as further described in Note 6(c). The identifiable intangible assets and related amortization are preliminary and are based on management’s estimates after consideration of similar transactions. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets and liabilities, and the related amount of amortization, may differ materially from this preliminary allocation. In addition, the amortization impacts will ultimately be based upon the periods in which the associated economic benefits or detriments are expected to be derived or, where appropriate, based on the use of a straight-line method and sum-of-the-years’ digits method. Therefore, the amount of amortization following the merger transactions may differ significantly between periods based upon the final value assigned and amortization methodology used for each identifiable intangible asset.
| Note 4. | Reclassification Adjustments |
The following reclassification adjustments were made to conform the presentation of Sprint’s financial information to T-Mobile’s presentation:
| (a) | To reclassify $863 million and $150 million of equipment installment plan receivables from accounts receivable and other assets, respectively, to current equipment installment plan receivables and equipment installment plan receivables due after one year, respectively. |
| (b) | To reclassify $3,409 million of accounts payable and $3,962 million of accrued expenses and other current liabilities, of which $5,715 million, $95 million, $1,453 million and $108 million was reclassified to accounts payable and accrued liabilities, payables to affiliates, deferred revenue, and other current liabilities, respectively. |
| (c) | To reclassify $191 million of accounts receivable and $5 million of other current assets to accounts receivable from affiliates. |
| (d) | To reclassify $109 million of long-term tower obligations from long-term debt to tower obligations. |
| (e) | To reclassify $1,136 million and $1,081 million of equipment rentals and equipment sales, respectively, to equipment revenues for the three months ended March 31, 2018. |
To reclassify $4,048 million and $4,524 million of equipment rentals and equipment sales, respectively, to equipment revenues for the year ended December 31, 2017.
| (f) | Reclassifications to selling, general and administrative totaled $266 million for the three months ended March 31, 2018 and included reclassifications of $67 million of severance and exit costs and $199 million of other, net. Reclassifications to selling, general and administrative totaled $88 million for the year ended December 31, 2017 and included $80 million of severance and exit costs and $8 million of other, net. The remaining balance of $479 million of other, net for the year ended December 31, 2017 was reclassified to gains on disposal of spectrum licenses. |
| (g) | To reclassify $2,075 million and $7,768 million of depreciation expense for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively, $184 million and $812 million of amortization expense for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively, $146 million and $493 million of cost of equipment rentals for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively, to depreciation and amortization. |
| (h) | To reclassify $19 million and $85 million of interest income in other income, net to interest income for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively. |
| Note 5. | Notes to Unaudited Pro Forma Condensed Combined Balance Sheet |
| (a) | Represents adjustments to the combined company cash balance, including (i) net proceeds from T-Mobile’s new debt financing, (ii) repayment of a portion of Sprint’s debt instruments anticipated to be repaid in connection with the closing of the merger transactions, including any fees associated with the repayment, and (iii) T-Mobile and Sprint transaction costs anticipated to be paid in connection with completing the merger transactions. Included in the $100 million cash outflow for T-Mobile transaction costs anticipated to be paid in connection with the merger transactions is the settlement of $4 million of transaction costs previously accrued for within other current liabilities in the historical T-Mobile balance sheet. |
| (dollars in millions) | ||||
| Cash proceeds from new debt financing, net of debt issuance costs |
$ | 25,645 | ||
| Repayment of T-Mobile debt |
(8,512 | ) | ||
| Repayment of Sprint debt |
(10,413 | ) | ||
| Payment of prepayment penalties |
(218 | ) | ||
|
|
|
|||
| Net cash inflow related to financing |
$ | 6,502 | ||
|
|
|
|||
| T-Mobile transaction costs anticipated to be paid |
$ | (100 | ) | |
| Sprint transaction costs anticipated to be paid |
(344 | ) | ||
|
|
|
|||
| Net cash outflow |
$ | (444 | ) | |
|
|
|
|||
| Write off of accrued transaction costs |
$ | (4 | ) | |
| (b) | Reflects the elimination of Sprint’s deferred cost of goods sold and deferred financing costs on Sprint’s historical balance sheet as a result of purchase accounting. |
| (c) | Reflects adjustments to (i) current and long-term deferred financing cost assets, (ii) current and long-term debt expected as a result of the merger transactions. The adjustments include the repayment of certain existing T-Mobile and Sprint debt, including any remaining original issue discount and the issuance of anticipated borrowings to fund the T-Mobile merger transactions, net of estimated original issue discounts. |
In connection with the merger transactions, T-Mobile currently intends to repay or redeem approximately $10.3 billion of Sprint’s outstanding debt at closing and to assume Sprint’s remaining outstanding debt of approximately $30.0 billion. T-Mobile also has agreed to repay or redeem approximately $8.5 billion of existing debt provided by Deutsche Telekom.
The anticipated new debt consists of $38.0 billion in secured and unsecured debt financing, including a $4.0 billion secured revolving credit facility (which we refer to as the “revolving credit facility”) which will not be drawn on initially, a $7.0 billion secured term loan facility (which we refer to as the “term loan facility” and, together with the revolving credit facility, the “senior secured credit facilities”), a $19.0 billion secured bridge loan facility (which we refer to as the “secured bridge facility”) and a $8.0 billion unsecured bridge loan facility (which we refer to as the “unsecured bridge facility”, and together with the secured bridge facility, the “bridge facilities”; and the bridge facilities together with the senior secured credit facilities, the “facilities”). On May 22, 2018, T-Mobile delivered a notice to the commitment parties pursuant to which the entire $8.0 billion unsecured bridge loan facility was reallocated to be part of the secured bridge loan facility, increasing the size of the secured bridge loan facility to $27.0 billion. Subsequently, on June 6, 2018, T-Mobile delivered a notice to the commitment parties pursuant to which the commitments under the secured bridge facility decreased by $8.0 billion, such that the remaining size of the secured bridge facility is $19.0 billion.
The adjustments to assets, current and long-term debt reflected in the unaudited pro forma condensed combined balance sheet are summarized as follows:
| (dollars in millions) | ||||
| Repayment of Sprint debt—issuance costs write-off |
$ | (23 | ) | |
|
|
|
|||
| Financing adjustments to total long-term assets |
$ | (23 | ) | |
|
|
|
|||
| Repayment of Sprint debt—elimination of accrued interest |
$ | (80 | ) | |
| Repayment of T-Mobile debt—elimination of accrued interest |
(67 | ) | ||
|
|
|
|||
| Financing adjustments to accounts payable and accrued liabilities |
$ | (147 | ) | |
|
|
|
|||
| Repayment of Sprint debt—elimination of short-term debt |
$ | (2,286 | ) | |
| Repayment of Sprint debt—elimination of short-term debt (debt issuance costs) |
2 | |||
| Repayment of Sprint debt—elimination of short-term debt (unamortized premium) |
(39 | ) | ||
| New debt—short-term |
19,053 | |||
| New debt—short-term (debt issuance costs) |
(187 | ) | ||
|
|
|
|||
| Financing adjustments to short-term debt |
$ | 16,543 | ||
|
|
|
|||
| Repayment of T-Mobile debt—elimination of short-term debt |
(445 | ) | ||
|
|
|
|||
| Financing adjustments to short-term debt to affiliates |
$ | (445 | ) | |
|
|
|
|||
| New debt—long-term |
$ | 6,947 | ||
| (dollars in millions) | ||||
| New debt—long-term (debt issuance costs) |
(168 | ) | ||
| Repayment of Sprint debt—elimination of long-term debt |
(8,047 | ) | ||
| Repayment of Sprint debt—elimination of long-term debt (debt issuance costs) |
90 | |||
|
|
|
|||
| Repayment of Sprint debt—elimination of long-term debt (unamortized premium) |
(48 | ) | ||
|
|
|
|||
| Financing adjustments to long-term debt |
$ | (1,226 | ) | |
|
|
|
|||
| Repayment of T-Mobile debt—elimination of long-term debt |
$ | (8,000 | ) | |
| Repayment of T-Mobile debt—elimination of long-term debt (debt issuance costs) |
(58 | ) | ||
|
|
|
|||
| Financing adjustments to long-term debt to affiliates |
$ | (8,058 | ) | |
|
|
|
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| (d) | Reflects adjustments to accumulated deficit to record (i) a gain on extinguishment of T-Mobile debt for $58 million and (ii) the payment of prepayment penalties and the write-off of debt issuance costs in connection with the repayment of the portion of Sprint debt that will not be assumed as part of the merger transactions. Amounts related to the repayment of Sprint’s debt do not impact pro forma combined company accumulated deficit, as Sprint’s accumulated deficit is eliminated as part of acquisition accounting adjustments. See adjustment 5(j). |
| (e) | Reflects the acquisition method of accounting based on the estimated fair value, largely based on benchmarking analysis of other similar transactions, of the property, plant and equipment, intangible assets and debt of Sprint. Goodwill represents the difference between the fair value of the estimated merger consideration and the fair value of the assets acquired and liabilities assumed in the merger transactions. |
| (dollars in millions) | ||||
| Property and equipment—elimination of historical |
$ | (19,925 | ) | |
|
|
|
|||
| Property and equipment—fair value |
14,571 | |||
|
|
|
|||
| Total property and equipment pro forma adjustment |
$ | (5,354 | ) | |
|
|
|
|||
| (dollars in millions) | ||||
| Goodwill—elimination of historical |
$ | (6,586 | ) | |
|
|
|
|||
| Goodwill—fair value |
3,138 | |||
|
|
|
|||
| Total goodwill pro forma adjustment |
$ | (3,448 | ) | |
|
|
|
|||
| (dollars in millions) | ||||
| Intangible assets—fair value of Spectrum licenses |
$ | 42,000 | ||
| Intangible assets—elimination of historical FCC and licenses and other |
$ | (41,309 | ) | |
| Intangible assets—elimination of definite-lived intangible assets |
$ | (2,465 | ) | |
| Intangible assets—fair value of other intangible assets |
$ | 7,157 | ||
| Assumed Sprint debt—fair value step-up |
$ | 396 | ||
| (f) | Reflects the fair value adjustment for Sprint’s deferred revenue as a result of purchase accounting for balances for which there are no remaining performance obligations. |
| (g) | Reflects a net increase in deferred tax assets of $2,090 million as a result of a reduction in Sprint’s valuation allowance, which is based on assumed taxable income of the combined entity. The |
| adjustment additionally reflects a $188 million net decrease in deferred tax assets associated with the incremental differences between book and tax basis created from the preliminary purchase price allocation, and $17 million to reflect a net decrease in deferred tax assets as a result of the elimination of T-Mobile historical interest for debt paid off. Deferred taxes on Sprint’s pre-tax pro forma adjustments were established based on an estimated blended federal and state statutory tax rate of 21.5%, net of tax effects on state valuation allowance. The estimated blended federal and state tax rate is not necessarily indicative of the effective tax rate of the combined company. |
| (h) | Reflects the elimination of Sprint’s deferred rent on Sprint’s historical balance sheet as a result of purchase accounting. |
| (i) | Reflects the elimination of Sprint’s historical common stock, capital in excess of par value and accumulated other comprehensive income, as well as an adjustment to reflect the vesting of certain T-Mobile employee performance-based restricted stock unit awards granted in connection with the merger agreement, which will vest 50% upon closing of the merger. For the adjustment for performance-based restricted stock unit awards, T-Mobile concluded that these new compensation arrangements were directly attributable to the merger transactions and factually supportable, and as such should be reflected in the pro forma condensed combined balance sheet to reflect the portion of the awards that will vest upon closing of the merger transactions. |
| (dollars in millions) | ||||
| Elimination of Sprint historical common stock |
$ | (40 | ) | |
| Elimination of Sprint historical accumulated other comprehensive income |
$ | 313 | ||
| Elimination of Sprint historical additional paid-in capital |
$ | (27,884 | ) | |
| Estimated value of T-Mobile common stock issued for outstanding shares of Sprint common stock |
25,021 | |||
| Estimated value of T-Mobile replacement equity awards attributable to precombination service |
190 | |||
| Estimated value of specified Sprint warrant |
8 | |||
|
|
|
|||
| Adjustment for T-Mobile performance-based restricted stock unit awards |
(37 | ) | ||
|
|
|
|||
| Adjustment to additional paid-in capital |
$ | (2,702 | ) | |
|
|
|
|||
| (j) | Reflects the adjustment to (i) eliminate Sprint’s historical accumulated deficit after pro forma adjustments, (ii) T-Mobile’s accumulated deficit to record T-Mobile deferred taxes, (iii) T-Mobile’s accumulated deficit to record the partial vesting of employee performance-based restricted stock unit awards granted in connection with the merger agreement which will vest 50% upon completion of the merger transactions and (iv) T-Mobile’s accumulated deficit to record transaction costs. The transaction costs primarily consist of fees for investment banking, legal and accounting services. The adjustments for transaction costs and the one-time vesting of performance-based restricted stock unit awards that will vest upon closing of the merger transactions are not reflected in the unaudited pro |
| forma condensed combined statements of operations because they are nonrecurring items that are directly attributable to the merger transactions. The adjustment to accumulated deficit is as follows: |
| (dollars in millions) | ||||
| Elimination of Sprint Accumulated deficit after adjustments |
$ | 1,501 | ||
| Adjustment for T-Mobile deferred taxes to Accumulated deficit |
(17 | ) | ||
| Adjustment for T-Mobile performance-based restricted stock unit awards to Accumulated deficit |
37 | |||
| Adjustment for T-Mobile transaction costs to Accumulated deficit |
(96 | ) | ||
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| Total adjustment to Accumulated deficit |
$ | 1,425 | ||
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| Note 6. | Notes to Unaudited Pro Forma Condensed Combined Statements of Operations |
| (a) | Reflects the elimination of deferred revenues and costs recognized in the historical statements of operations of Sprint primarily related to amounts collected or incurred by Sprint at the beginning of a customer contract for upfront activation fees, and the associated costs, each of which were amortized over the longer of the contract life or the estimated customer life. Deferred activation revenues and costs are not eligible for recognition in purchase accounting as they represent amounts collected and incurred in prior periods for which there is no future performance obligation or economic benefit, as applicable. As a result, amortization associated with these items has been eliminated. |
| (b) | Reflects the adjustments to (i) reverse incurred and non-recurring transaction costs, which were recorded in T-Mobile and Sprint’s selling, general and administrative expenses, (ii) stock-based compensation expense for the post-combination portion of Sprint’s equity awards assumed by T-Mobile, and (iii) reflect additional stock compensation expense for additional grants of performance-based restricted stock units to four T-Mobile executives in connection with the transactions contemplated by the business combination agreement, of which 50% will vest subsequent to the close of the merger transactions. However, the pro forma condensed combined statements of operations do not include the $37 million expense for the first 50% of the additional shares granted that vest upon closing of the merger transactions, because these items will not have a continuing impact on the combined company. The new stock-based compensation expense is amortized on a straight-line basis over the remaining vesting periods. The transaction costs reflected in historical statements of operations and the adjustment to stock-based compensation expense are as follows: |
| Pro Forma Three Months Ended March 31, 2018 |
Pro Forma 12 Months Ended December 31, 2017 |
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| (dollars in millions) | (dollars in millions) | |||||||
| Reversal of T-Mobile transaction costs |
$ | (6 | ) | $ | (9 | ) | ||
| Reversal of Sprint transaction costs |
— | (25 | ) | |||||
| Adjustment to stock-based compensation expense from equity-based awards |
(20 | ) | (77 | ) | ||||
| Adjustment for T-Mobile performance-based restricted stock unit awards expense |
4 | 16 | ||||||
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| Total adjustment to Selling, general and administrative expense |
$ | (22 | ) | $ | (95 | ) | ||
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| (c) | Represents the adjustments to record (i) the elimination of historical depreciation and recognition of new depreciation expense based on the fair value of property, plant and equipment and (ii) the elimination of historical amortization expense and recognition of new amortization expense related to |
| identifiable intangible assets calculated on a straight-line basis, except for customer relationships, which is calculated using the sum-of-the-years’ digits method. The amortization expense for customer relationships, which is not calculated on a straight-line basis, for the 5 years post-acquisition are $1,020 million for 2017, $907 million for 2018, $793 million for 2019, $680 million for 2020 and $567 million for 2021. The depreciation of property, plant and equipment is based on the estimated remaining useful lives of the assets, and is calculated on a straight-line basis. The amortization of intangible assets is based on the periods over which the economic benefits of the intangible assets are expected to be realized. |
| Pro Forma Three Months Ended March 31, 2018 |
Pro Forma 12 Months Ended December 31, 2017 |
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| (dollars in millions) | (dollars in millions) | |||||||
| Reversal of Sprint’s historical property and equipment depreciation |
$ | (2,075 | ) | $ | (7,768 | ) | ||
| Depreciation of purchased property and equipment assets |
1,363 | 5,451 | ||||||
| Reversal of Sprint’s historical intangible asset amortization |
(182 | ) | (799 | ) | ||||
| Amortization of purchased identifiable intangible assets |
304 | 1,331 | ||||||
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| Total intangible asset amortization and property and equipment depreciation expense |
$ | (590 | ) | $ | (1,785 | ) | ||
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| (d) | Reflects the adjustment to interest expense to accrete the interest related to the fair value of Sprint debt assumed by T-Mobile. |
| (e) | Reflects the adjustments to (i) reverse interest expense associated with the anticipated repayment of Sprint and T-Mobile’s existing debt and modified T-Mobile notes, (ii) recognition of new interest expense associated with the new debt financing and (iii) recognition of new interest expense associated with the modified T-Mobile notes. |
| Pro Forma Three Months Ended March 31, 2018 |
Pro Forma 12 Months Ended December 31, 2017 |
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| (dollars in millions) | (dollars in millions) | |||||||
| Elimination of historical interest expense related to repayment of T-Mobile’s debt |
$ | 128 | $ | 356 | ||||
| Interest expense related to T-Mobile’s modified notes |
(35 | ) | (154 | ) | ||||
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| Financing adjustments to interest expense to affiliates |
93 | 202 | ||||||
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| Elimination of historical interest expense related to repayment of Sprint’s debt |
$ | 168 | $ | 654 | ||||
| Interest expense related to new debt financing |
(471 | ) | (1,579 | ) | ||||
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| Financing adjustments to interest expense |
$ | (303 | ) | $ | (925 | ) | ||
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A sensitivity analysis on interest expense for the three months ended March 31, 2018 and the year ended December 31, 2017 has been performed to assess the effect of a change of 1/8% of the hypothetical interest rate would have on the debt. The interest rates assumed for purposes of preparing
this pro forma financial information related to the new revolving credit facility, term loan facility and secured bridge facility are approximately 3.6%, 4.1% and 3.6% as of March 31, 2018, respectively. These rates are comprised of the three-month LIBOR rate of 2.34% as of July 25, 2018, plus certain margins specified in the facility agreements. A 1/8% increase or decrease in interest rates would result in a change in interest expense of approximately $8 million for the three months ended March 31, 2018 and approximately $32 million for the year ended December 31, 2017.
| (f) | A blended federal and state statutory tax rate of 21.5% and 35.5%, net of tax effects on the state valuation allowance, for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively, has been assumed for the pro forma adjustments. The blended tax rate is not necessarily indicative of the effective tax rate of the combined company. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities, cash needs, the geographical mix of income and changes in tax law. |
| (g) | Represents the pro forma weighted average shares outstanding that have been calculated using the historical weighted average shares of T-Mobile common stock outstanding and the additional T-Mobile equity awards estimated to be issued in conjunction with the merger transactions, assuming those shares and awards were outstanding for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively. |
| Pro Forma Basic Weighted Average Shares |
Pro Forma Three Months Ended March 31, 2018 |
Pro Forma 12 Months Ended December 31, 2017 |
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| Historical T-Mobile weighted average shares outstanding—basic |
855,222,664 | 831,850,073 | ||||||
| Shares of T-Mobile common stock to be issued to Sprint stockholders pursuant to the business combination agreement |
425,313,246 | 425,313,246 | ||||||
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| Pro forma weighted average shares—basic |
1,280,535,910 | 1,257,163,319 | ||||||
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| Pro Forma Diluted Weighted Average Shares |
Pro Forma Three Months Ended March 31, 2018 |
Pro Forma 12 Months Ended December 31, 2017 |
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| Historical T-Mobile weighted average shares—diluted |
862,244,084 | 871,787,450 | ||||||
| Shares of T-Mobile common stock to be issued to Sprint stockholders pursuant to the business combination agreement |
425,313,246 | 425,313,246 | ||||||
| Diluted impact of T-Mobile’s stock options and awards to replace Sprint’s stock options |
651,407 | 640,407 | ||||||
| Diluted impact of T-Mobile’s RSUs to replace Sprint’s RSUs and PSUs |
5,596,628 | 4,159,473 | ||||||
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| Pro Forma weighted average shares—diluted |
1,293,805,365 | 1,301,900,576 | ||||||
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