Although Sprint (S, Financial)'s merger with T-Mobile (TMUS, Financial) was announced back in April, it likely won't close until summer 2019. But with an assumed closing price of $7.03, the deal gives Sprint investors an 18% annualized gain at its current price.
For now it's business as usual. The two companies signed a long-term spectrum lease deal that comes to $533 million, and it should survive any failure of the tie-up. Sprint has seen its financial performance swing positive after nearly a decade of losses. Wireless revenue grew year-over-year for the first time in five years. Free cash flow has been positive in six of the last seven quarters. The company has produced four straight quarters of net income, all highlighting positive aspects heading into 2019.
For the seven people who don't know, Sprint is a wireless carrier that serves over 35 million post and prepaid customers in the U.S. That's good for fourth place in the industry. It's owned by Japanese conglomerate SoftBank with an 85% stake, which has been on the news a lot lately because of its ties with Saudi Arabia.
Now, the company is looking to tie up Sprint with the third-place carrier in the U.S., T-Mobile, which is majority owned by Deutsche Telekom. And, on Oct. 31, the deal inched even closer to completion as T-Mobile's shareholders approved the buyout. Next up, regulatory approvals.
On Sprint's side of the deal, the company reported earnings, revenue and subscriber growth in its latest call on Halloween with the company adding over 109,000 monthly subscribers and booking $196 million in net income on $8.43 billion in revenue for the quarter.
The better-than-expected results are in large part thanks to its commitment to unlimited data packages and bundles with Hulu, Amazon Prime and Tidal music streaming. For cord cutters, these bundles can provide cost savings and make Sprint's mobile service more sticky, meaning less churn.
Whether this is for show or an actual turnaround is yet to be seen, and investors are right to be dubious of any long-term sustainability in Sprint's business model. That being said, on a price-book and price-sales basis, both under 1.0x currently, the company is a valuable addition for T-Mobile. If Sprint was priced at its five-year average price-book or price-sales, its value would be 28% higher, but since T-Mobile has put an arbitrary number on the merger, Sprint's stock has been held back.
Some analysts believe that Sprint faces a binary outcome that depends on its proposed merger with T-Mobile, with severe downside risks, but that overlooks the SoftBank ownership. If U.S. regulators sign off, the combined firm is expected to prosper and create significant value for shareholders. But, if the deal is killed, the company will still be the fourth-largest carrier in the country and have approximately 27 million monthly postpaid customers. It's worth a flyer, if nothing else.
Disclosure: I am not long/short any stock mentioned in this article.
