Despite The Chatter, A Sprint T-Mobile Merger Remains Unlikely

The stock prices of Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) gained roughly 13% and 3.5%, respectively, since the results of the U.S. Presidential election were declared. The markets appear to be betting that the new Presidential Administration could be more amenable to consolidation within the telecommunications industry, opening the doors for a potential merger between the country’s third and fourth-largest wireless carriers. Below we analyze the possibility of a deal emerging and how the regulatory environment could pan out.

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The Possibility Of A Deal Remains

Sprint considered acquiring T-Mobile back in 2014, but the deal didn’t materialize after the Obama administration cited antitrust concerns on account of higher industry concentration. That said, even today, the advantages of a potential deal could be significant for shareholders of both companies, as wireless is a essentially a fixed cost business, with significant scope for cost synergies in network operations and maintenance, marketing, customer service and administration. Moreover, both companies still seem amenable to a merger. Marcelo Claure, Sprint’s CEO and Masayoshi Son, the head of its parent Softbank, have previously indicated that they could re-look at the possibility of a deal, if the election brought about changes to the regulatory environment. T-Mobile’s parent company Deutsche Telekom also remains open to selling T-Mobile, although it indicated that it would hold off on the possibility until the completion of the end of the 600 MHz spectrum auction (expected to end in early 2017) that it is participating in, as carriers are forbidden from discussing deals during this period.

Regulatory Environment And Rationale

While President-elect Donald Trump’s plans regarding big-ticket mergers aren’t clear yet, he has come out against media deals such as AT&T’s deal to buy Time Warner. That said, there are some indicators that he could be more flexible with telecom transactions. For instance, Mr. Trump is reportedly relying on a Washington veteran, with a track record of taking a pro-telecom industry stance, to help with the transition of the FCC, which has significant sway over the outcome of large telecom mergers (it was the FCC that shot down AT&T’s proposed acquisition of T-Mobile in 2011).

If a deal is struck, it would be interesting to see the line of reasoning that Sprint would employ to push for regulatory clearance. The most likely argument is that a combined entity of Sprint and T-Mobile (which would hold 31% market share in terms of total subscribers) would be able to compete more effectively with Verizon and AT&T, who hold market shares of 35% and 32%, respectively. However, there are multiple arguments that could go against Sprint as well. Sprint doesn’t appear to be facing an existential crisis at the moment, amid positive postpaid customer adds and projected revenue growth. Moreover, the competition between T-Mobile and Sprint has actually been healthy for the U.S. wireless market, fostering a lot of service innovation (device leasing and installment plans, new value-added services) while helping to keep pricing in check, proving positive for U.S. customers.

T-Mobile Could Be Too Pricey For Sprint 

That said, there could be financing issues in Sprint’s potential pursuit of T-Mobile. T-Mobile’s stock price is up by more than 70% since Sprint dropped its plans for an acquisition in 2014, and its market cap currently stands at roughly $44 billion. Moreover, T-Mobile’s recent momentum could indicate that it will seek a healthy premium to its market price in the event of a merger. There is also a possibility that a bidding war could emerge, as well-capitalized companies such as Google and Comcast have been looking to play a bigger role in the wireless space, making them possible suitors for T-Mobile. Sprint’s resources on, the other hand, remain weak. With net debt of over $31 billion, the carrier has been bolstering its liquidity by mortgaging its core assets and slashing costs. Sprint’s parent firm Softbank also has its hands tied to an extent after it announced a $32 billion deal to buy British chip designer ARM Holdings, limiting its ability to bankroll another large acquisition.

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