What Lies Ahead For Sprint As T-Mobile Merger Falls Through?

by Trefis Team
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T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) officially called off their merger talks last weekend after they were unable to reach mutually agreeable terms, as Sprint’s parent company Softbank was apparently reluctant to give up control over the carrier. While we view the outcome as a net negative for both carriers (who would miss out on significant cost synergies) and the broader U.S. wireless market (which could risk a continuation of the intense price wars), Sprint appears to have the most to lose, considering its challenging financial and operational situation.

We have an $8 price estimate for Sprint, which is about 30% ahead of the current market price. We will be updating our price estimate for the company to account for the recent developments.

Sprint Faces Significant Challenges As It Goes It Alone

While Sprint has been turning around its operations, progress has been relatively slow, and it may take a while before the company returns to sustained profitability. Although the carrier has been able to post positive postpaid subscriber net adds over the last several quarters, it has come at the cost of aggressive discounting. While Sprint has offered the lowest pricing in the industry (unlimited data at $60 for a single line), its net adds haven’t been in line with rivals. For instance, Sprint added 279k postpaid phone subscribers over the last quarter, while Verizon posted 486k net adds and T-Mobile added 595k subscribers. Sprint’s financial situation also remains precarious, as its debt load stands at around $38 billion, with close to half the amount coming due over the next four years. The carrier has had to resort to mortgaging assets such as spectrum to bolster its liquidity position and cut interest costs, which come in at roughly $600 million each quarter. Sprint likely needs more liquidity, as it will have to invest significantly in wireless infrastructure in the next few years, with the wireless industry on the cusp of a transition from 4G to 5G technology.

Softbank To Increase Its Investment In Sprint

SoftBank revealed plans to increase its stake in Sprint, which already stands at roughly 82%, noting that it views that company as a critical part of its plans for the U.S. market. Softbank has been investing billions of dollars over the last few years, betting that everyday devices and sensors will be connected via the Internet, gathering data that can be processed using machine learning and AI. From this perspective, the company views wireless connectivity as being central to its vision, making Sprint a crucial strategic asset. This could indicate that Softbank may bankroll Sprint further to meet its goals. There is a small chance that Sprint could seek an alternative transaction, but the possibilities remain few (Sprint was in exclusive talks with cable behemoths Comcast and Charter Communications a few months ago) and Softbank’s apparent interest in maintaining control could also complicate issues. Sprint is expected to hold an investor event soon, potentially giving investors a look at its strategy for going it alone in the U.S. wireless space.

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