Is a Sprint Corp (S) and T-Mobile US Inc (TMUS) Merger Off the Table?

Sprint - Is a Sprint Corp (S) and T-Mobile US Inc (TMUS) Merger Off the Table?

Source: Mike Mozart via Flickr (modified)

Shares of Sprint Corp (NYSE:S) rallied Tuesday on news of a wireless deal. However, it wasn’t with the company you may think — T-Mobile US Inc (NASDAQ:TMUS). Instead, Sprint stock was climbing after the company reportedly held discussions with Charter Communications, Inc. (NASDAQ:CHTR) and Comcast Corporation (NASDAQ:CMCSA).

Sprint stock S

Before we discuss the news, though, let’s look at a little background.

Sprint and T-Mobile

It was no secret that Sprint and T-Mobile would make a for formidable duo. This is especially true given the powerful one-two punch that is AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ). Although there’s concern over antitrust issues, a strong case could be made that a deal between Sprint and T-Mobile would allow it to better compete with the two conglomerates while also benefiting consumers.

However, because of the recent spectrum auction the federal government held, any merger talks between participating companies had to put on hold for almost a year. Because spectrum is an important component to wireless companies, both S and T-Mobile were involved in the auction. Thus, talks were on hold.

Earlier this month, Sprint CEO said there could be “great” synergies with T-Mobile. However, he also said there could be other companies in the mix when it comes to strategic options. I guess he wasn’t bluffing.

For T-Mobile’s part, the CFO called Sprint the most logical partner for it in May.

So Now What’s the Scoop?

It was pretty clear that investors were expecting some type of deal. However, even though S isn’t in the best financial shape, it’s clearly seeing some demand. Hence Sprint stock is up 5% on Tuesday’s report, while T-Mobile is down 3%.

The latest talks suggest that CHTR and CMCSA are looking at S in an effort to offer wireless services to their customers. However, it is not an acquisition, but rather a network resale deal, though it could also involve an investment in Sprint.

While these reports understandably have S stock moving higher, it doesn’t mean a deal with T-Mobile is off the table. However, it does mean discussions of such a deal will be pushed back.

The dead vs. just stalled argument seems to favor the latter.

According to the reports, the talks with S, CHTR and CMCSA will be exclusive for two months. After that period, S can apparently resume discussions with T-Mobile. So long as Sprint isn’t acquired by Charter or Comcast (not likely), T-Mobile and Sprint can still work out a deal. This is a likely end result, assuming they can come to terms.

In the end, it will likely come down to Softbank Corp. (OTCMKTS:SFTBY) management, given that SFTBY owns more than 80% of Sprint.

What’s This Mean for Sprint Stock?

Let’s look at Sprint’s chart to see just where things stand as of Tuesday.

Sprint stock chart
Click to Enlarge

In the accompanying chart, we can see the level between $7 and $7.50 is quite significant (black line) for S. It has been both support and resistance over the last five years. Prior to late-2016, Sprint stock has only held up over this level area for a brief time.

So long as S stock stays above this area, investors can be long.

Additionally, the MACD (orange circle) looks to be turning bullish. This would be positive for momentum, but is not yet confirming such a trend. If it does swing positive, it may very well be enough to power Sprint stock through current resistance near $9.50 (purple line).

However, Sprint sports a market capitalization of roughly $33 billion. Meanwhile, debt stands near $40 billion and S continues to lose money each year. The positives are that Sprint’s recent revenue and net income results have been trending in the right direction as it adds more subscribers.

Sprint stock is shaping up OK. There are positive trends in the business and there is way to play the stock with a limited-risk outlook. Namely, can consider T-Mobile. TMUS is still holding support above its 200-day moving average and just hit its lowest price since February.

T-Mobile carries roughly 50% less debt than Sprint, is profitable and is growing revenues at a faster rate.

All in all, Tuesday’s decline in TMUS may be a better opportunity than Sprint stock. Keep in mind, though, that today’s news may weigh on T-Mobile going forward.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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