The biggest news in the stock market recently is perhaps that a federal judge approved the proposed $85 billion acquisition of media giant Time Warner Inc (NYSE:TWX) by telecom giant AT&T Inc. (NYSE:T). Considering the sheer size and scope of this merger, many market watchers believe that the ruling sets a precedent that strikes down overarching anti-trust concerns, and paves a clearer and easier path for future M&A.
From this perspective, the merger is particularly good news for Sprint Corp (NYSE:S) shareholders.
I’m excited to announce that @TMobile & @Sprint
have reached an agreement to come together to form a new company – a larger, stronger competitor that will be a force for positive change for all US consumers and businesses! Watch this & click through for details.
— John Legere (@JohnLegere) April 29, 2018
Sprint stock has been on a roller coaster ride over the past several months ever since its proposed merger with T-Mobile Us Inc (NASDAQ:TMUS). Sprint stock has rallied and dropped as traders have speculated on the odds of this merger going through.
The federal ruling in favor of the AT&T/Time Warner merger hugely boosts the odds of the Sprint/T-Mobile merger going through. Naturally, Sprint stock has rallied since the ruling.
Can this rally continue?
I think so. Although Sprint/T-Mobile provides bigger anti-trust concerns than AT&T/Time Warner, I’d still be fairly shocked to see this merger not go through. Under the assumption that the likelihood of this deal passing is greater than 70%, I think Sprint stock should trade in the upper $5’s.
Here’s a deeper look.
Sprint/T-Mobile Merger Should Go Through
Approval of the AT&T/Time Warner merger is a big win for corporate America. It is also a big loss for the Department of Justice who, while under President Donald Trump, has been a big opponent of over-consolidation in the business world.
As a result of this legal precedent, there is a clearer and easier path going forward for future M&A of all sorts. Investors and analysts are speculating about more media companies joining forces. There are even murmurs out there that Facebook Inc (NASDAQ:FB) or Amazon.com, Inc. (NASDAQ:AMZN) might weaponize their balance sheets for an acquisition soon.
All of this is great news for the Sprint/T-Mobile merger.
Granted, this merger does have its own set of unique ant-trust concerns which, in sum, are larger than the anti-trust concerns offered in the AT&T/Time Warner merger. Namely, there are really only four players in the wireless carrier market, and now two are them want to join forces, inherently implying less competition going forward.
But AT&T and Verizon Communications Inc. (NYSE:VZ) have such dominant share in this market anyways that it should be considered a duopoly. Adding a third big player into the mix could actually add competition. Moreover, competition in this market, particularly on pricing, is notoriously ruthless. A merger between Sprint and T-Mobile won’t end decades of ruthless competition.
Altogether, I’d be shocked if this merger didn’t go through.
Sprint Stock Should Trade North of $5.50
This is an all-stock transaction in which Sprint stock is valued at a fixed rate of T-Mobile stock. Specifically, the deal values one share of Sprint at 0.10256 shares of T-Mobile.
With T-Mobile stock hovering around $60, that implies a takeover value for Sprint stock of roughly $6.15. Meanwhile, if the deal doesn’t go through, Sprint stock could drop to $4-5, essentially where the stock was trading prior to merger rumors emerging.
If you give the merger 50/50 odds of going through, then Sprint stock should trade around $5.33 (50% chance of going to $6.15 and 50% chance of going to $4.50). A 60% approval likelihood lends itself to a $5.49 fair value, while a 70% approval likelihood equates to a $5.66 fair value and an 80% approval likelihood equates to a $5.82 fair value.
Thus, unless you think there is a 50/50 or lower probability of the Sprint/T-Mobile merger going through, Sprint stock looks undervalued here and now. I peg the likelihood of this deal passing as north of 70%, and thus believe Sprint stock should trade in the upper $5’s.
Bottom Line on Sprint Stock
Approval of the AT&T/Time Warner deal dramatically increases the chances of the Sprint/T-Mobile proposed merger going through. Under the assumption that there is a greater than 70% chance of this deal going through, I think Sprint stock should trade in the upper $5’s.
As of this writing, Luke Lango was long T, S, TMUS, FB and AMZN.