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Communication Services: Undervalued With a Case of Merger Fever

U.S. telecom consolidation is in the works with a T-Mobile-Sprint merger.

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  • Overall, we view the communications services sector as undervalued at a market-cap-weighted price/fair value of 0.82.
  • U.S. telecom consolidation is in the works with a T-Mobile-Sprint merger.
  • In Europe, telecom is focused on convergence and increased build-outs of fiber and 4G.
  • In telecom and cable, we continue to see migration from traditional pay-TV providers to over-the-top, or OTT, offerings.

In the U.S., after two prior failed attempts,  T-Mobile (TMUS) and  Sprint (S) have reached a long-anticipated agreement to merge the two firms, with T-Mobile retaining its brand and management team as part of the planned merger. The deal will likely face hefty regulatory scrutiny, as it shrinks the number of nationwide wireless telecom providers from four to three. Yet both T-Mobile and Sprint are behind the industry leaders,  AT&T (T) and  Verizon (VZ), and a deal would be a panacea for Sprint in particular as the business strives to keep pace. We currently believe the deal has a 50/50 chance of passing through the current regulatory environment, as the loss of a fourth player may lead to higher wireless data prices for consumers in the United States. T-Mobile and Sprint touted the number of U.S. jobs that would be added by a merger, perhaps in an attempt to pre-emptively alleviate any regulatory concerns, yet job additions would likely reduce the combined firm's ability to extract cost savings, and we're not yet convinced that the comments made by both T-Mobile and Sprint will be enough to sway regulators. We don't expect a regulatory decision on this deal until 2019, but it would obviously shift the U.S. telecom landscape if consummated.

Brian Colello 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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