Why Sprint Is Painting A Grim Picture Of Its Business To Regulators

by Trefis Team
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Sprint (NYSE:S) recently made presentations to the FCC as part of its bid to gain approval for its merger with T-Mobile (NASDAQ:TMUS). The company painted a grim picture of its business, which it says is unable to “turn the corner”, while also indicating that a merger would create a stronger competitor to wireless behemoths AT&T and Verizon. In its presentation, Sprint explicitly mentions that there is no obvious path to solve its key business challenges as it needs to make network investments to drive user growth and ARPU, but it’s unable to meaningfully bolster its cash flows because of high subscriber defections and churn, which are forcing it to offer aggressive promotions. The company also said that it has already slashed about $10 billion in costs, indicating that cost-cutting is reaching its limit.

The presentation selectively focused on the negative aspects of Sprint’s business and is at odds with the company’s positive management commentary in its recent earnings call, where it emphasized its 12th straight quarter of postpaid phone subscriber growth and net profit. However, this narrative could be key in getting regulators to decide that the deal will be good for the company and U.S. wireless subscribers.

We have created an interactive dashboard that outlines our expectations for Sprint over 2018 as well as fiscal 2019. You can modify the key drivers to arrive at your own revenue and EPS estimates for Sprint.

Impact On Competition And Prices Will Be Key

Two key factors that regulators are likely to focus on in the merger review process will be the impact of the deal on competition and prices of wireless services for consumers. Although a proposed merger was dropped in 2014, amid opposition from the Antitrust Division of the Justice Department and the FCC, the current administration could be more amenable to a merger. For their part, Sprint and T-Mobile have been looking to build a narrative that the merger will be good for wireless customers, as it creates a stronger rival to market leaders Verizon and AT&T. For instance, Sprint’s CEO has indicated that the merger would lower costs for subscribers, with the two companies estimating upwards of $6 billion in cost synergies, which could partly be passed on to customers. The savings relating to a joint buildout of the next generation 5G networks could also be very significant.

However, critics of the merger contend that increasing market concentration with just three major players is unlikely to incentivize carriers to continue to compete as strongly. Additionally, T-Mobile and Sprint have been fierce competitors, bringing down prices and offering a lot of value-add for customers, forcing the larger two players to follow suit. The absence of this competition could drive up pricing power in the industry.

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