For some time now, investors and observers have predicted a merger between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS). That speculation has driven a run-up in S stock since the election. There’s an obvious logic to a tie-up. Most notably, the combination of the No. 3 and No. 4 U.S. carriers would present a larger, tougher competitor for Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T). And, of course, Sprint intended to buy T-Mobile a few years ago, only to abandon its bid amid pushback from U.S. regulators.
With a new Administration in the White House, and GOP control of Congress likely to change the makeup of the key Federal Communications Commission, the regulatory environment should be more favorable for a combination of Sprint stock and T-Mobile stock. But there’s one potential catch: Both companies might be performing too well at the moment.
Sprint Stock: Why S Should Buy T-Mobile
There’s a reason Sprint stock gained over 12% the day after Donald Trump’s surprise election win. Investors clearly believed a Republican-majority FCC would be more amenable to the industry as a whole, and particularly to a S-TMUS merger.
As an industry analyst told Bloomberg in August, there’s a ‘rule of thumb’ regarding antitrust regulation: Republicans want at least three competitors in an industry, and Democrats want at least four. That should mean a much better chance for Sprint to buy out T-Mobile and get the deal past regulators.
And Sprint has long wanted such a deal, even after giving up in 2014. The August article from Bloomberg revealed that Masayoshi Son, head of Softbank Corp. (Japan) (OTCMKTS:SFTBY), still wants to buy T-Mobile. Since Softbank owns over 80% of Sprint, Son has effective control over the company. If he still wants to buy out TMUS stock, as appears to be the case, holders of S stock will have little choice but to follow.
Such a deal makes sense operationally. A combined Sprint/T-Mobile could save literally billions of dollars a year in employee expense, technical spend and marketing. Given that the two smaller companies have grown nicely of late, the combined company actually would have more subscribers than Verizon, and almost as many as AT&T, as a Wells Fargo analyst pointed out last month.
Sprint already saved over $100 million a year in interest costs by cleverly issuing bonds backed by its spectrum. It could issue similar bonds backed by T-Mobile’s spectrum to lower interest costs on the debt required to fund the acquisition. And while Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY) has rejected buyout offers from other companies in the past, it does seem willing to sell its TMUS stock — for the right price.
Spring Stock: Why S Shouldn’t Buy T-Mobile
However, there are two potential hurdles to a TMUS takeover for Sprint. The first is that the regulatory path may not be quite as easy as investors think at the moment. It’s true that in theory, a GOP-controlled federal government should look more favorably on the merger. But a simple Tweet from Trump already has cast doubts on the merger between AT&T and Time Warner Inc (NYSE:TWX). More generally, investors should be aware that no one is quite sure what President Trump will do (and that appears to include the President-elect himself).
The long-term prospect of tight control of U.S. media — think AT&T/DirecTV, Verizon/Comcast Corporation (NASDAQ:CMCSA) (another merger that has been rumored) and Sprint plus T-Mobile plus Dish Network Corp (NASDAQ:DISH) or Charter Communications, Inc. (NASDAQ:CHTR) may not sit well — even with Republicans.
The related, but larger, problem, might be that both Sprint stock and T-Mobile are performing too well at the moment. The original S deal for TMUS would have cost about $32 billion; the more likely number would be more than twice that, including the assumption of debt. Yet even after tripling over the past year, Sprint stock is worth only slightly more than it was for most of 2013.
Meanwhile, TMUS stock has doubled since the last time S and T-Mobile were in serious discussions. Both factors make an acquisition for Sprint much more expensive in terms of cash and/or shares of S stock that must be issued to TMUS shareholders.
The deal also sounds very different to regulators than it did three to four years ago. The original merger was between two struggling companies. It certainly seemed possible at the time that without such a deal, one or both of S or TMUS might eventually have to exit the U.S. market. Sprint and T-Mobile could argue to regulators that without a combination, there might only be two operators left in a decade. That argument doesn’t fly anymore, with Sprint stock taking on Verizon head-to-head and T-Mobile taking subscribers from all of its rivals.
Bottom Line on S Stock
So while a Sprint-TMUS merger makes some sense, it’s far from guaranteed. DISH supposedly looked at buying T-Mobile in the past. And it’s not at all impossible to imagine T-Mobile and Dish joining up, while Charter and S do the same. One would think that both TMUS stock and Sprint stock would be part of the M&A landscape at some point over the next few years. But it’s not at all certain that it will be with each other.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.