Sprint Corp (S) Is Bound to Merge, But With Whom?

Sprint stock is due to be bought out

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A long time ago, the telecoms were in a war of attrition. Sprint Corp (NYSE:S) had once been an upstart telecom, offering cheaper service and allegedly better quality. As the years went by, the telecoms became commodities and entered into a multi-year pricing war that continues to this day. Since then, Sprint stock has gone nowhere over the past ten years.

Sprint Corp (S) Is Bound to Merge, But With Whom?
Source: Sprint

The other telecoms have pursued mergers, moving into media and satellite. S stock must do the same if it is to survive. The question is who will Sprint stock merge with? To me, there are only two obvious choices, although one might happen followed by the other.

Sprint Stock: Who Is the Best Merger Candidate?

The first obvious choice is T-Mobile US Inc (NASDAQ:TMUS). Remember, SoftBank Group Corp (OTCMKTS:SFTBF) owns far more than a majority of S stock, and tried to merge with TMUS in 2013. Alas, the Federal Communications Commission spiked the deal. That, however, was under a less business friendly administration. There was also an obstacle at the time about telecoms even talking about merging, although that has since gone away during the low-band spectrum auction deal that occurred last year.

The merger makes sense because, were Sprint stock to merge with TMUS, it would have a powerhouse base of about 130 million subscribers. There’s a problem, though, in that the combined entity would have $50 billion in debt, costing it about $3.8 billion per year to service. Free cash flow for the combined entity would be negative. That’s a very different scenario from rival AT&T Inc. (NYSE:T), which carries a ton of debt, but also has ample free cash flow.

On the other hand, Sprint thinks its spectrum is worth $40 billion, so from a debt standpoint, this is not a critical situation. It could sell that spectrum if need be, but as long as debt can be serviced, that won’t be necessary. More importantly, the high-band spectrum is a must when 5G rolls around, so now is the time for SoftBank to make a move.

Nevertheless, one issue remains, even for a merged entity: What next? The business model has to evolve. Which is why the combined entity might then merge with Comcast Corporation (NASDAQ:CMCSA), or perhaps some mix-and-match occurs that ends up in a three-way tie-up.

Comcast launched Xfinity Mobile, so it obviously wants mobile telecom as part of its bundle. It’s a lot easier to buy S than build from scratch. Or perhaps TMUS ends up with Comcast and leaves S stock out in the cold.

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