Why T-Mobile And Sprint Are Rekindling Their Merger Talks

Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) appear to be back at the negotiating table, marking the third time that the two companies are exploring a potential combination. While we view a potential merger as a being a net positive for both companies and the broader U.S. wireless industry, it remains unclear as to how much has changed since the two companies called off their last round of merger talks in 2017. Our interactive dashboard analysis outlines our valuation estimates and forecasts for both Sprint and T-Mobile.

Benefits Of The Deal Remain Immense For Both Carriers 

The biggest reason the two carriers are looking to restart talks is likely to avoid the duplication of future capital expenditures, as the wireless industry transitions from 4G technology to next-generation 5G technology. Sprint has a deep portfolio of 2.5 GHz spectrum holdings that could be used for 5G deployment, allowing the combined company to avoid some outlays that they may otherwise have to undertake individually. Moreover, wireless is a very high fixed cost business, on account of sizable network operation and maintenance costs as well as sales and marketing expenses. We had previously estimated that the present value of synergies stemming from a deal could stand at upwards of $20 billion. Additionally, the carriers may also have better pricing power in a saturating wireless market if a deal goes through.

Sprint Should Be Willing To Relinquish Control

The last round of talks fell through in late 2017, as the two companies were unable to agree on who would have control over the combined entity, and it’s not clear how much has changed since last year. T-Mobile’s majority owner Deutsche Telekom (which owns a ~63% stake) apparently views its ability to consolidate T-Mobile’s earnings with its financials as key,  given that the U.S. carrier is one of its most valuable assets. This means that the company could be willing to put in more money to increase its effective stake in the joint entity and retain control. While Sprint is likely to have less bargaining leverage in a potential deal, considering its comparatively challenging financial position, with over $30 billion in long-term debt, its parent Softbank may still want to keep control of the joint entity. Softbank has been doubling down on the Internet of Things space, and it’s likely that it views Sprint as a crucial part of this plan, given its nationwide wireless network in the U.S.

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