Is Sprint Corp (S) Stock the Biggest Winner in Potential T-Mobile Merger?

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The idea of T-Mobile US Inc. (NASDAQ:TMUS) buying Sprint Corp (NYSE:S) is one of the worst kept secrets on Wall Street. The rumors started even before Softbank Group Corp (OTCMKTS:SFTBF) acquired most of Sprint in 2013, although back then the assumption was Sprint would be the buyer, not the seller. Resistance from Obama regulators killed that deal by 2014.

Is Sprint Corp (S) Stock the Biggest Winner in Potential T-Mobile Merger?

But T-Mobile CEO John Legere, who joined the company in 2012, has proven to be a superb marketer. TMUS stock is up 177% since Sprint came to the stock market under Softbank in 2013, while S stock is up just 32%.

Most of that gain came after Softbank bought ARM Holdings last September, and the idea of T-Mobile buying Sprint was revived.

Since then, the rumors have done nothing but heat up.

This year, for instance, Legere has said he’d consider it, and Softbank reportedly said it was no longer insisting on control of the combination.

Why does this deal make such sense?

The Real Reason for the TMUS and S Deal

Everyone knows the financial reasons for the deal. Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) each hold one-third of the U.S. mobile market. Sprint and T-Mobile share the other third. Combining S stock and TMUS turns the market from a duopoly with two weak sisters into a more competitive three-way race.

Many traders also know the physics of why a deal might happen. Softbank CEO Masayoshi Son has shifted from a focus on building a single global wireless play to building a $100 billion acquisition war chest through Fortress Investment Group LLC, which Softbank bought for $3.3 billion in February. 

But there’s another reason, a more technical one, driving the deal.

Sprint owns a lot of very high-frequency spectrum, which it wants to use through a new network of tiny cell towers, built on existing telephone poles. The new design would let it deliver a lot more coverage in dense urban areas, at low cost.

While S was making its technical moves, TMUS was preparing bids that would deliver an $8 billion win for low-frequency spectrum being abandoned by TV stations. Most of its wins were in under-served rural areas that have never had service before. It did not bid high in the big urban markets like Houston, Atlanta, New York and San Francisco, where Sprint’s high-frequency, high-density plans are being implemented.

Combine T-Mobile’s low-frequency TV spectrum with Sprint’s high-frequency high-density play and you get a single carrier that can cover literally everyone, with plenty of capacity to serve their needs for years to come.

John Legere can sell that.

How Fast?

These plans may come to fruition quickly.

I think Legere’s talk of merging with Comcast Corporation (NASDAQ:CMCSA) is a head fake. If Legere didn’t want to work for Son, why would he want to work for Brian Roberts?

Right now, TMUS stock has a market cap of $53 billion, against a market cap of $33 billion for S stock. Combine the two, build out the new network, sell off any assets that are not mobile, and you’re in an even fight with Verizon, which is worth $203 billion, and AT&T, worth $253 billion.

While Sprint stock took off last summer, when the rumors got started, its shares are flat so far in 2017, while those of T-Mobile stock are up 13%. This makes a potential deal even more attractive. And the combination of assets would have huge advantages the market has not yet considered.

If you believe in the merger argument, buy some S stock. If you believe in the merger’s potential results, buy some TMUS stock. The company is growing 20% per year even without Sprint, it is generating enough operating cash flow to handle their current capital budget, and less than one-third of the assets are under debt.

It may be the last great deal in telecommunications. Can you hear me now?

Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/sprint-corp-s-stock-biggest-winner-t-mobile-merger/.

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