According to a report from Bloomberg, it looks like that there are preliminary discussions regarding a merger between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS). While such rumors have come and gone during the past few years, the circumstances may be much better this time around for Sprint stock holders.
“Basically anything is possible. But I think the No. 1 favorite, the quickest route to synergy, is the option that we pursued from the start — T-Mobile. However, it’s also up to the other side and whatever conditions they may have. Therefore, if there are other opportunities for industry consolidation that offer better conditions, of course we want to consider them with an open mind.”
Note that Son’s firm has a hefty 80% holding in Sprint stock. Now, of course, M&A is pretty tough to predict. This is especially the case in a highly regulated industry like telecom. Just a few years ago the U.S. government blocked Sprint’s attempted acquisition of TMUS.
OK then, so why now? What makes Sprint attractive? Well, let’s take a look:
Sprint Stock Buyout Reason #1: Pressure
Son is one of the world’s richest persons because of his innate sense of markets and trends. And so with Sprint, he know that there needs to be a major change.
For the most part, the competitive environment is getting tougher. Keep in mind that AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) have introduced unlimited data plans, which will likely make it more difficult for Sprint to garner new customers. Keep in mind that the company recently dropped its 50%-off deal for plans from VZ and T.
Something else that is probably motivating a deal is Sprint’s heavy debt load of $35.9 billion (this includes capital leases). Consider that the quarterly payments are about $631 million and that the company will need to pay off $11 billion in debt by 2020. So by merging with TMUS — which has substantial cash flows — Sprint should help alleviate this burden.
Sprint Stock Buyout Reason #2: Regulatory Environment
A merger of Sprint and TMUS would result in the U.S.’s No. 2 carrier, with 99.1 million customers. This would drop T to No. 3 with 91.2 million and VZ would remain No. 1 with 113.9 million.
So yes, this would spark concerns with regulatory authorities. But then again, the Trump administration is certainly pro business. Actually, Son has noted that — because of this — he believes there is a good chance for approval.
Besides, last week’s announcement of a partnership of Comcast Corporation (NASDAQ:CMCSA) and Charter Communications, Inc. (NASDAQ:CHTR) may lessen the scrutiny. These companies have agreed to build their own wireless network, which will likely increase the overall competitiveness in the industry.
Sprint Stock Buyout Reason #3: Synergies
All mega mergers are complex and fraught with risks. But a combination of Sprint and TMUS should be well worth the challenges. First of all, both companies have complementary networks. Sprint’s has broad swaths of high-frequency spectrum, whereas T-Mobile is concentrated on the low-end. Next, there should be significant cost savings. Let’s face it, there are likely to be quite a few redundancies across the organizations of both Sprint and TMUS.
Oh, and Son has already noted that he would allow TMUS’s standout CEO, John Legere, to run the combined entity. He not only has a great knack for marketing — just look at the wild success of the “Un-carrier” branding — but has shown that he knows how to generate substantial profits.
OK then, so how might the synergies be allocated in a deal? Well, this is difficult to gauge. But Son’s average cost in Sprint stock is roughly at $7 per share.
In other words, it seems like a good bet he’ll try to negotiate aggressively (since the current stock price is at only $7.88). Interestingly enough, Barclays PLC (ADR)(NYSE:BCS) analyst Amir Rozwadowski estimates that the synergies could translate into a valuation of $14 for S stock. Not too shabby.
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.