Charter And Comcast Court Sprint, But T-Mobile Remains Its Best Bet

by Trefis Team
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The Wall Street Journal reports that cable behemoths Charter Communications and Comcast (NASDAQ:CMCSA), have entered into exclusive talks with Sprint (NYSE:S) to discuss plans to offer wireless services, putting Sprint’s merger talks with T-Mobile (NASDAQ:TMUS) on hold temporarily. There are multiple outcomes that could stem from the discussions. The most likely outcome is that Comcast and Charter will sign a deal for access to Sprint’s nationwide network, much like the MVNO deal Comcast has with Verizon for its Xfinity mobile services. There is also a possibility that they could pick up an equity stake in Sprint, allowing them to extract much more favorable terms for re-seller agreements. There also remains a small possibility that one or both companies could buy Sprint outright. This may also make sense, given the potential to cut costs in areas such as sales and customer support, while prepping Sprint for next-gen 5G technologies, which require dense fiber networks for backhaul (see Why Cable Companies Are Still Interested In The Cutthroat Wireless Market). That said, we think it’s unlikely that the net-value added by a cable deal would match the sheer extent of cost synergies that could come from a Sprint – T-Mobile merger.

Trefis has a $8 price estimate for Sprint, which is roughly in line with the current market price.

See our complete analysis for  Comcast |T-MobileSprint 

Why T-Mobile Remains The Best Bet For Sprint

Wireless is a very high fixed cost business, on account of significant network operation and maintenance costs as well as sales and marketing expenses. For instance, T-Mobile’s cost of services (excluding depreciation) and SG&A costs together stood at about $17 billion last year, while the same two cost buckets for Sprint totaled $16.3 billion. If we assume that the combined entity is able to cut total costs by just about $1 billion for the first year post-closing – with net cost savings coming in at $2 billion in year two and remaining at ~$3 billion from year three to perpetuity – the present value of synergies after tax (35% tax rate and 9% discount rate) would stand at roughly $20 billion, per our estimates. The net value added by a cable deal is unlikely to top this number.

Before the news of the cable talks, there were reports that T-Mobile’s parent company, Deutsche Telekom, was preparing an all-stock offer to acquire Sprint, and the news of the new negotiations could force it to sweeten any potential offer. Moreover, the Journal reported that a merger between Sprint and T-Mobile could still occur even if Sprint reaches a re-seller agreement with Charter and Comcast. That said, in the unlikely event that Sprint gets bought out by the cable duo, it should be able to extract a sizable premium considering the huge opportunity cost of not pursuing a T-Mobile deal.

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