On Aug. 6, Sprint (NYSE:S) stock jumped on merger news. The government announced that it was conducting a thorough review of the proposed merger between Sprint and T-Mobile (NASDAQ:TMUS).
Although investors remain optimistic about the merger, past failures to gain approval for mergers involving the companies weigh on both stocks. Given the uncertainty surrounding the merger and the financial challenges facing S stock, investors should avoid this equity.
S Stock Rose on “Non-News” Related to the Merger
Sprint’s shares rose by almost 10% on the government’s announcement, even though no indication was given as to whether the merger would be approved. T-Mobile is working to convince regulators to approve the deal. In an unusual move, the carrier cut its prices in an effort to convince regulators that the merger would not hurt poor people. Whether this move will sway any regulators remains unclear. It does, however, show how committed T-Mobile is to the merger.
The deal has faced opposition from the government in the past, and the companies decided not to merge after holding talks about the matter last year. The parent companies of Sprint and T-Mobile — Softbank (OTCMKTS:SFTBY) and Deutsche Telekom (OTCMKTS:DTEGY) — would have had to part with a large number of assets to get the deal approved.
Sprint Cannot Survive on Its Own Over the Long-Term
Despite the recent move higher, Sprint continues to struggle both financially and competitively. The company, which is losing traction as its market share falls, has long remained the fourth largest mobile carrier behind Verizon (NYSE:VZ), AT&T (NYSE:T), and its suitor, T-Mobile.
Wall Street predicts that Sprint will continue to lose money this year and every year through at least 2021. Moreover, Sprint’s revenue has not grown much since 2015. In each of the next two years, analysts expect its revenues to rise by less than 1% annually.
The market capitalization of S stock is under $25 billion, even though its debt exceeds $40 billion. Also, if one looks closely at the company’s balance sheet, another troubling point become evident.
As of the first quarter of this year, the company claimed that S stock had over $26 billion of stockholders’ equity. However, hard-to-define goodwill and intangible assets of over $50 billion are the only things backing up this so-called equity.
Recent Move Higher Presents an Opportunity to Sell S Stock
Despite the company’s troubles, the recent surge took S stock to around $6.10 per share. Assuming the merger goes through, stockholders will receive $6.62 per share, reflecting the price that T-Mobile agreed to pay for Sprint. If we assume a $6.10 per share entry point, the potential profits from staying in S stock amount to an additional 52 cents per share.
But if the merger fails, investors could lose their entire position, since Sprint could go under in that scenario. In my view, risking everything to hopefully gain less than 10% makes little sense. I would advise investors to sell their shares at these levels.
Final Thoughts on S Stock
Due to the financial difficulties and the politics of the T-Mobile takeover, investors should stay away from S stock. A lot rides on this deal, particularly for Sprint. The company finds itself in financial straits that it probably cannot navigate on its own. With high debt and mounting losses, it will struggle to stay relevant in the wireless industry.
The current price of S stock gives investors an interesting option. They can sell now at a modest discount to the price of the proposed merger. If they hold the equity, they can gain around 50 cents per share or they could lose everything. Given these realities, investors should sell S stock and move on to safer, more profitable positions.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
