On my usual morning reading of The Wall Street Journal, I stumbled upon an interesting piece of news a few days ago: Sprint (NYSE:S) is considering making a bid for T-Mobile US (NASDAQ:TMUS) during the first half of 2014. If the deal were to go through, the U.S. wireless market would become dominated by three big companies: Verizon Wireless (NYSE:VZ), AT&T (NYSE:T) and Sprint. However, the company has not yet confirmed this move, mainly because of regulatory (antitrust) boundaries.
The stock is up more than 13% since the news got out on Dec. 13. In this context, I would like to take a close look at the company´s prospects and the way in which this acquisition would impact its profitability.
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About the Bid
Sprint is not the first carrier that has tried to buy T-Mobile. Two years ago, AT&T had already made a $39 billion bid to buy T-Mobile, but the U.S. Justice Department did not approve the acquisition. Nonetheless, Masayoshi Son, owner of more than 80% of Sprint’s stock is pushing for the Sprint-T-Mobile deal to happen. On the other hand, the WSJ reported, Deutsche Telekom AG (DTEGY), which owns about 67% of T-Mobile, is said to be looking for a possible buyer for this last company, in order to leave the U.S. market.
Although the company resulting from the merger of Sprint and T-Mobile would create a very concentrated market, its subscriber base would still be substantially smaller than those of Verizon and AT&T. Notwithstanding, it could successfully snatch some of these carriers’ market share by offering lower prices and new plans (like they both have been doing in the recent past).
Lots of speculation regarding regulatory concerns has arisen. However, the outcome is still uncertain. But, if the merger finally went through, it would provide Sprint with the necessary scale to really compete with its larger rivals, driving down its operating costs.
With a market cap slightly over $36 billion, Sprint is the third-largest carrier in the U.S. Many analysts argument that, despite its third-runner position, the company holds the strongest spectrum position in the industry. Furthermore, the recent deal with Softbank (SFTBF) – where Masayoshi Son is the CEO – only strengthened Sprint’s competitive position, mainly by providing it with the cash necessary for the Clearwire acquisition (slightly overpaid, in my opinion), and the purchase of some of U.S. Cellular (NYSE:USM)’s assets. Furthermore, the deal also enabled the company to return value to its shareholders (Softbank paid $21.6 billion for a 78% stake in Sprint, and entitled shareholders to a cash consideration of $16.64 billion from SoftBank).
In addition to its recent purchases, Sprint´s future will be largely determined by the success of its ongoing restructuring initiatives, known as Network Vision. This reorganization is expected to generate about $11 billion in savings by 2017 (in the period 2011-2017). Moreover, the plan is expected to drive margin expansion considerably (accounting for about 50% of 2014’s margins). In fact, the company’s OBITDA margin is expected to grow by 1200 1600 basis points by the end of 2014.
|Operating Margin (%)||-5.1||11.4||10.2||16.2|
While Sprint’s future looks promising. Its valuation and recent performance, don’t. In fact, most investment gurus (from Jim Simons to Leon Cooperman and Mario Gabelli) and hedge funds have been selling this stock lately. It looks like it’s time to stay away from this company, and sell if you hold the stock, take advantage of the price upsurge triggered by the T-Mobile bid rumors.
Disclosure: Damian Illia holds no position in any stocks mentioned.