Will Sprint and T. Mobile U.S. Ever Find Common Ground?
Media outlets report that the two are once again in discussions to merge, but consummating such a transaction has been fraught with difficulty, and we don't see that changing.
The Wall Street Journal reported on April 10 that Sprint (S) and T-Mobile US (TMUS) are once again in discussions regarding a merger. We continue to believe that strategically a merger would be in the best interest of both companies. However, consummating such a transaction has been fraught with difficulty, and we don’t see that changing. The last talks ended when Softbank demanded control of the combined company. We think this is a ridiculous requirement and will never get past Deutsche Telekom, the controlling shareholder of T-Mobile US. However, with Sprint’s stock dropping precipitously to below $5 per share after the last talks failed to go anywhere, Masayoshi Son, Softbank’s chairman and controlling shareholder, may be more willing to negotiate in terms of both price and control. For now, we are maintaining our stand-alone fair value estimates of $5.25 per share for Sprint and $67 per share for T-Mobile and our no-moat ratings for both firms. If the two companies can agree on a merger and it receives regulatory approval, we would probably raise our fair value estimates.
Our thesis for years has been that on their own, the two companies are too small to compete long term against Verizon and AT&T due to the significant cost advantages the two bigger firms have from their significantly larger subscriber bases. Wireless networks are expensive to build and maintain. Those fixed costs can be spread over a much larger customer base by Verizon and AT&T. Despite T-Mobile’s success over the past four years it still has less than half the subscribers of the bigger two and lower EBITDA margins. By combining T-Mobile and Sprint the companies would gain scale similar to AT&T and Verizon. However, regulators like the aggressive nature of smaller players with T-Mobile being the global poster child for such activities, so even if the two companies reach an agreement there is no assurance regulators will approve the deal. We think the odds of a successful deal remain low.
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Allan C. Nichols does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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