Third Time a Charm for the Sprint and T-Mobile Merger?
The number 3 and 4 mobile players will try to merge again, but regulatory approval is far from assured.
Sprint (S) and T-Mobile US (TMUS) announced on April 29 that they have agreed to merge. T-Mobile will pay 0.10256 share of its stock for each Sprint share, which values Sprint at a stock price of about $6.62 (based on the April 27 closing price for T-Mobile), a market capitalization of $26 billion, and an enterprise value of $59 billion. The combined company, which will retain T-Mobile's brand and chairman, CEO, and COO, will have an enterprise value of $146 billion. Deutsche Telekom will control 42% of the combined company, and Softbank will control 27%.
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.
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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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