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

Together, T-Mobile and Sprint can build a cell network that covers everyone in the U.S.

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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.

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.

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Article printed from InvestorPlace Media,

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