Third Time a Charm for the Sprint and T-Mobile Merger?

The deal represents the third attempt to merge the two companies, and this time the price T-Mobile is paying is much more reasonable, in our opinion. However, we still think receiving regulatory approval will be difficult, and we only put the odds at 50/50. We expect to increase our fair value estimate for no-moat Sprint to about halfway between our stand-alone fair value estimate of $5.25 and the implied deal price of $6.62. We also anticipate slightly raising our $67 fair value estimate for no-moat T-Mobile, as even a 50% chance of the deal closing will result in greater synergies than what T-Mobile will pay for Sprint (again, assuming the deal closes). That said, our initial take is that some of the expected synergy savings will be used for increased marketing and retention efforts.

The deal announcement pre-emptively tried to sway regulators, touting benefits such as the combined company’s ability to compete against the larger AT&T and Verizon in 5G, as well as the number of jobs the deal would add. We agree that the deal would enable the company to better compete in 5G, but we aren’t convinced these talking points will move the regulators. Regardless of the outcome, no regulatory decision on the deal is expected until 2019.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.