Sprint Corp Stock Is a Risky Bet on Wild Card M&A Chances

Sprint stock - Sprint Corp Stock Is a Risky Bet on Wild Card M&A Chances

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When it comes to the wireless carrier market, we all know that there are two Goliaths, Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T), and two Davids, Sprint Corp (NYSE:S) and T-Mobile Us Inc (NASDAQ:TMUS).

But the Davids want to make the wireless carrier market an industry with three Goliaths.

Rumors have been circulating for several months regarding a potential merger between Sprint and T-Mobile. Now, those rumors have turned into reality. Just last week, Sprint and T-Mobile announced a $26-billion merger in which the two companies would join forces under the T-Mobile umbrella.

Sprint stock jumped. The deal valued Sprint stock at levels north of $6.50, so the stock jumped to right around those levels on the announcement.

Now, though, Sprint stock is taking a step back. Analysts have issued largely cautious notes regarding the probabilities of this deal passing regulatory hurdles. Investors are heeding those warnings and now are applying a discount to the company’s implied takeover value.

Naturally, you might be asking yourself right now: Should I buy Sprint stock?

I don’t think so. The whole upside thesis in Sprint stock hinges on this deal going through. If it doesn’t, the downside risk is immense. For that reason, I think the way to play the Sprint-T-Mobile deal is through buying TMUS stock.

Here’s a deeper look.

Regulatory Hurdles Ahead

Personally, I think the Sprint-T-Mobile merger will be good for competition in the wireless carrier market and result in lower prices across the board for consumers.

But I’m not so sure regulators will see it that way.

The arguments for why this deal should go through are pretty simple. Verizon and AT&T control such a large portion of the wireless carrier market that they essentially operate without competition. Thus, consumers are left at their mercy when it comes to pricing and contracts.

But a combined Sprint-T-Mobile entity would turn two minor players into a third major player. That third major player would leverage cost-saving synergies to lower prices for consumers. In response, Verizon and AT&T would lower their prices, and competitive dynamics would take over to result in more choice and better prices for consumers.

I think that is the most likely outcome.

But I also see the other side of it.

Regulators will have a tough time giving the “OK” on this deal because the wireless carrier market is already so small in terms of competitive forces. There are essentially only four legitimate players in the space right now. Thus, this deal takes an already-small market and makes it smaller. Regulators tend not to like that.

Moreover, there is no guarantee that Sprint and T-Mobile will follow through on their promises and utilize cost-savings to lower prices for consumers. Instead, the combined entity might just use scale to its advantage, much like Verizon and AT&T, and actually hike prices. After all, if Sprint and T-Mobile merge, there really isn’t another sufficiently large player which consumers can flock to.

Sprint Stock Is Priced Appropriately

Broadly speaking, there are strong arguments on both sides when it comes to whether this deal will pass regulation. As such, this deal going through is far from a sure thing.

I’ve seen analysts peg the probability of this deal going through at 40%, 50%, 80% and everything in between.

In other words, this is a wild card. And when you have a wild card, the best thing to do is go with 50/50.

At current TMUS prices, Sprint stock is valued at around $6.50 in a takeover. In the event that the deal falls through, Sprint stock could fall back to the $4-5 levels it was at before these M&A rumors gained traction.

Therefore, I see a 50% chance of Sprint stock going to $6.50, and a 50% chance of it going to $4.50. That combination yields a present value of roughly $5.50, which is right around where shares trade today.

Bottom Line on Sprint Stock

Until Sprint stock falls below $5.50, I don’t see any reason to the own it. The risk-reward profile is simply too much risk and not enough reward.

If you are looking to play the Sprint-T-Mobile deal, I would suggest looking into TMUS stock. Downside risk over there looks relatively mitigated, while upside potential is still strong.

As of this writing, Luke Lango was long TMUS, VZ, and T. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/05/sprint-stock-is-a-risky-bet-on-wild-card-ma-chances/.

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