Limited Options For Sprint If T-Mobile Merges With Dish Network

T-Mobile (NYSE:TMUS) is in talks with Dish Network (NASDAQ:DISH) about a merger, according to a recent Wall Street Journal report. The report states that both sides are in broad agreement over the structure of the combined entity but other major details such as purchase price and cash-stock mix are still unresolved. The potential merger looks like a win-win situation for both companies, with T-Mobile getting Dish’s wireless airwaves to expand coverage as well as capacity and the latter getting a good opportunity to enter the wireless business, in addition to easy access to almost 57 million subscribers. However, this could have major ramifications for Sprint, which has been struggling to turn around its loss-making wireless operations and is on the cusp of being overtaken by T-Mobile as the third largest wireless carrier in the U.S. ^[1]

With AT&T on the verge of acquiring pay-TV major DirecTV, Verizon diversifying its revenue channels with AOL and T-Mobile-Dish talking about a merger, Sprint will most likely face even more formidable opponents in the near future. This casts some doubts on the possibility of a successful turnaround of its fortunes. To put things in perspective, Sprint reported overall net additions of 1.2 million subscribers but lost 201,000 of the lucrative postpaid phone customers in the last quarter. Its overall revenues declined almost 7% year-over-year in Q4 FY14 as users shifted to discounted service plans. In terms of income, the carrier reported a net loss of $224 million, or 6 cents per share compared to a loss of 4 cents per share in the prior year quarter. It currently has net debt of over $28 billion and has not reported positive free cash flows in the last two years. It reported negative $914 million in free cash flow the last quarter ending March 2015.

Our price estimate for Sprint is $6, which is more than 20% ahead of the current market price.

See our complete analysis for Sprint

Whats Next For Sprint?

Notwithstanding its success in the latest AWS-3 spectrum auction, Verizon is expected to be vying to further improve its spectrum holdings considering that it controls more than 40% of total postpaid subscribers in the U.S. but less than 20% of total available airwaves. In this scenario, the silver lining for Sprint is that it could sell wireless spectrum assets in the secondary market with relative ease, with Dish’s spectrum holdings likely to be utilized by T-Mobile, if the merger comes to fruition. Although there is a considerable difference in the quality of spectrum held by Sprint (2.5 GHz) and Dish (1.7-2.2 GHz), Verizon could utilize Sprint’s higher frequency airways to add capacity to its existing network. Considering that the carrier’s 4G network already covers over 98% of the country’s population, adding capacity in key areas is likely to take precedence over improving coverage. This could offer considerable support to Sprint’s balance sheet and give it more time to reverse its operational losses.

The other possible scenario for Sprint could be to partner with a company which can offer the possibility of efficient bundling of different services and diversify its sources of generating cash. The most obvious candidate for this seems to be cable provider Comcast (NASDAQ:CMCSA) which could use Sprint’s spectrum holdings to improve its presence in the rapidly expanding online video market. However, Comcast might have concerns over Sprint’s debt load and continued struggle in the U.S. wireless market, considering that its own net debt stands at over $43 billion. Independent of the approach Sprint follows going forward, it is important to understand that the carrier might not be able to compete effectively against the larger players in a market where the boundaries between wireless and cable/online video is blurring. There has been no comment from Sprint’s management on this as of now but we are keeping a keen eye on the developments.

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1. Dish Network in Merger Talks With T-Mobile, WSJ, June 4 2015 [↩]