How Accretive Will The Merger Between T-Mobile & Sprint Be For Service Margins?

by Trefis Team
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The merger between T-Mobile (NASDAQ:TMUS)  and Sprint (NYSE:S) is expected to come to fruition by Q2 2019, as the U.S. Department of Justice and FCC complete their review of the transaction. The cost synergies stemming from a merger are expected to be significant, coming in at about $6 billion per year within four years. In this note, we take a brief look at the potential service operating margins of the combined entity after the integration is complete and synergies are realized.

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Network-Related Savings

Operating a wireless network entails significant fixed costs relating to capital expenditures as well as operating expenses such as switch and cell site costs that include rent, network access costs, utilities, and maintenance. The companies expect their annual network-related cost savings to come in at about $4 billion a year within four years, with the entire network integration process likely to take three years. However, the joint entity is expected to incur about $10 billion in costs towards the network integration process (about $3.3 billion per year), and we assume that these costs will be expensed by 2021.

SG&A Savings

There are likely to be significant savings in SG&A costs as well. For instance, the combined entity is expected to see run-rate synergies relating to sales, service, and marketing of roughly $1 billion, with back office-related savings (which include IT, billing, back office costs) to stand at about $1 billion per year. However, the integration process could take three to four years. We assume that the integration will be complete in three years, with the $5 billion in integration costs expensed by 2021.

Overall Impact On Service EBIT Margins

Assuming that the overall synergies kick in by 2022, the combined company could see its service margins expand to 21%, compared to 19% and 1%, respectively, for T-Mobile and Sprint on a standalone basis. Overall EBIT for the merged entity would stand at $12.8 billion versus a combined $6.8 billion for the two standalone companies.

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