Are Sprint, T-Mobile Finally Going To Make A Deal?

Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) are reportedly close to finalizing a merger agreement, which could be agreed to in the next few days. Per Reuters, Deutsche Telekom – majority owner of T-Mobile – would own over 40% of the combined entity. While it appears as though the two carriers – the third- and fourth-largest U.S. wireless carriers – are finally going to come to an agreement on the long-rumored deal, it should be noted that talks have fallen through before.

We view a Sprint/T-Mobile merger as a net positive not only for the companies and their shareholders, but also for the U.S. wireless industry as a whole. In this note we discuss the potential benefits and risks of a deal. We have also created interactive dashboards that outline our valuation estimates and forecasts for Sprint and T-Mobile. Should the two companies finally come to an agreement, we will update these dashboards to show what the combined entity may ultimately look like.

Benefits Of A Deal 

In our view, the most significant benefit of a merger of T-Mobile and Sprint would be the potential capital expenditure savings. U.S. wireless carriers are beginning to transition to next-generation 5G technology for their networks, which will be extremely capital-intensive and require substantial spectrum holdings. Sprint’s deep portfolio of 2.5 GHz spectrum could be used for 5G deployment and allow the combined entity to avoid duplication in capital outlays.

In addition to the potential capex savings, a merger would likely allow for significant operating expense reductions, and consequently margin expansion. The wireless business is very high-fixed cost in nature, due to the massive network operation and maintenance costs (which are largely fixed). If the two carriers’ networks and operations are combined, there would be scope for meaningful margin expansion.  We previously estimated the present value of synergies from a deal at upwards of $20 billion. Further, the combined carrier could have better pricing power in the competitive wireless market, which would provide even further upside.

Sprint/Softbank Appear To Be Willing To Relinquish Control

As mentioned above, Reuters reports that Deutsche Telekom would own over 40% of the combined company, and be able to consolidate it on its books. Previously, Sprint and T-Mobile – and their majority owners Softbank and Deutsche Telekom, respectively – had been unable to agree on who would have control over the combination. The ability to consolidate the carrier’s earnings with its financials was reported to be key for Deutsche Telekom, and it appears as though the German telecom giant will be getting its way.

We will be closely watching for an announcement in the coming days, and will be interested to see what the terms are should a deal finally happen.

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