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Sprint-T-Mobile Merger Brings Huge Upside Potential to the Former
Posted by: Mayank Marwah (IP Logged)
Date: June 7, 2014 10:54AM

Sprint (S) and T-Mobile (TMUS) merger talk have gone around for at least six months. But now, the two companies have finally reached a tentative deal. While the Federal Communications Commission (FCC) and the Department of Justice (DoJ) are hard to please, the deal has found some supporters who believe that the combination augurs well for the wireless industry, and in no way is a threat to competition. Instead, once Sprint and T-Mobile join forces, the industry would be blessed with an effective telecom contender, fighting the duopoly of Verizon (VZ) and AT&T (T).

The Deal in Depth

The real test for the two begins now. This summer Sprint and T-Mobile are reportedly said to finalize on the deal. Sprint is expected to make a transaction proposal of $32 billion to T-Mobile. Under the current terms, the Kansas carrier would be paying $40 a share for T-Mobile. In addition to this, the mobile operator would also takeover T-Mobile’s net debt of approximately $9 billion. This draws concerns towards the third largest carrier’s ever increasing debt burden.

Once the two agree with the offer, the case would be carried forward to the cynical antitrust regulators. The companies are going to have a tough time in convincing the regulators. A few months ago, DoJ chief said that any combination proposal among the national carrier would not get an easy approval. The FCC chairman also shared a similar sentiment and said that the existence of four carriers in the wireless industry is essential to keep competition healthy.

If the regulators continue to carry the same thought, a merger between the two will fall through, just the way the AT&T and T-Mobile deal crashed. The regulators should understand that the wireless industry has evolved overtime and is not the same the way it used to be in 2011 or 2012. Back in 2011, the AT&T and T-Mobile proposal fell through due to antitrust issues, but now it’s a different scenario altogether. Telecom players are offering complete suite of services, such as top speed internet, wireless cellular services, and pay-TV services. The industry has become more dynamic. AT&T proposes to acquire DirecTV (DTV) to strengthen its full suite of services. The overlap between cable companies and telecom providers is increasing.

Surviving in Isolation Is a Tough Job

Considering these things, the regulators might reflect on the proposal instead of rejecting outright. But if the deal falls through, Sprint would have to bear the break-up fee payment of $1 billion to T-Mobile. However a merger between the two is essential for their existence, Sprint’s in particular. After as many as four years of regular losses, T-Mobile has seen profitable numbers and solid subscriber addition in the past two quarters. The improvement comes from the aggressive moves and the uncarrier approach the company adopted to provide stiff competition to AT&T.

Masayoshi Son, Softbank’s chief executive is extremely keen on the merger to happen. He says once the deal is approved and complete, the combined entity would be able to “go with a more massive price war.” T-Mobile is already known for offering plans at very competitive rates.

Departing Thoughts

Where is the deal headed remains unknown. But if it materializes, Sprint would have huge upside potential. Sprint’s stock could gain massively in case the deal gets a green signal from the regulators. It would have a solid impact on the earnings potential of Sprint and simultaneously give it a good valuation boost.

Stocks Discussed: T, VZ, TMUS, S, DTV,
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