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.
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.
Comcast, of course, bought up NBCUniversal, so the content-distribution play makes it akin to the AT&T buyout of DIRECTV and Time Warner Inc (NYSE:TWX), should Sprint end up in the bundle.
Bottom Line on S Stock
The trick with content is that it has to be good, and for the past several years, NBCUniversal has not been particularly impressive on that front. Meanwhile, Time Warner’s HBO continues to make great content. So this may not make that much difference in the long run.
The other possible direction is Liberty Global plc – Class A Ordinary Shares (NASDAQ:LBTYA), which is the largest international TV and broadband company, with 29 million customers. It is also saddled with debt, but John Malone has never been fearful of debt as long as his asset cash flows, and LBTYA has very consistent free cash flow of about $3.3 billion.
Sprint has had quite a run off its bottom. It’s difficult to say what might happen, and even buying Sprint stock as a trade feels like it has limited upside. If anything, I think the play here is to actually buy SoftBank stock, since it owns 80% of S anyway, and it has a highly diversified business. That way, you get any upside of a sale with downside risk blunted by the diversified portfolio of SoftBank.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
