When it comes to investing, betting on a buyout can be dicey. While there may be many reasons for a deal, management may still think it’s better to remain independent (yes, it’s a good bet that they just want to keep their jobs). One company that meets this criteria is Sprint Corp (NYSE:S).
Granted, Sprint’s share price has already baked in some type of transaction — S stock has added about 46% over the past six months.
But sometimes there are major catalysts to move a deal forward — which are hard to ignore. Some examples include the potential for a hefty premium, or perhaps that the industry is getting too competitive.
Yet there could be more gains to come.
The Bull Case for Sprint Stock
First of all, S stock could be weighed down by the rising competitive pressures. During the past few months, the mega operators — AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) — have ramped promotions and discounting. In fact, Sprint recently dropped its 50% off deal, as VZ and T have launched their own unlimited data plans.
In other words, it’s going to get tougher for Sprint to standout. At the same time, the company could ultimately be marginalized, as it is already No. 4 player in the mobile market. The company has not posted full-year profits since 2006 and the customer growth continues to lag T-Mobile US Inc’s (NASDAQ:TMUS), even though there has been traction with the ad campaign with Paul Marcarelli (Verizon’s jilted ex-pitchman).
For example, in the latest quarter, Sprint reported a 5% increase in revenues and 577,000 net customers, while TMUS grew its top line by 11% and added 1.1 million net customer. There was also a nice GAAP-profit of $698 million, up from $479 million on a year-over-year basis.
So to help preserve value for holders for Sprint stock, exploring an M&A option does look like a good move.
Something else: the timing could be spot-on. After all, as of Thursday, telecom companies are allowed to begin discussions on merger transactions, which marks the end of the “quiet period” set by the FCC regarding spectrum auctions.
And yes, when it comes to Sprint stock, the buzz is that the ideal partner is T-Mobile. A deal would not only result in much more scale to compete against T and VZ, but also fill important gaps in the networks. Sprint owns a large portion of high-frequency spectrum, whereas T-Mobile is concentrated on the low-end. No doubt, there should be lots of cost-cutting opportunities.
The Real Deal For Sprint Stock?
Yet, the endgame for S stock may be a deal with a cable operator. Already Comcast Corporation (NASDAQ:CMCSA) has indicated it wants to move into the mobile market, which will make its other offerings more attractive to customers.
But of course, there are other potential companies that may want to pursue the same strategy, such as Dish Network Corp (NASDAQ:DISH), Charter Communications, Inc. (NASDAQ:CHTR) and Altice NV.
All in all, this could mean that Sprint stock may be the target of a bidding war — which could drive up the valuation. We’ve already seen this with AT&T’s proposed buyout of Straight Path Communications Inc (NYSE:STRP) — a holder of valuable swaths of spectrum. It looks like Verizon has made a higher bid. Actually, since early April, STRP stock has soared from $36 to $131.
So the irony is that Sprint stock’s weaknesses can make its stock a hot commodity. In light of this, why remain independent — especially when the mega rivals are getting more aggressive? Hey, might as well sell now when the valuations could perk up, right? Definitely.
Granted, this does not mean that a deal is a foregone conclusion for Sprint stock holders. But then again, it’s going to be tough for Sprint’s management to just sit on the sidelines.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
