Over the past few months, the telecommunications industry has enjoyed a lift in attention, and for good reason. With Verizon (NYSE:VZ) leading the 5G high-speed network rollout, the new technology has strong implications for everyone. That includes relative bit-player Sprint (NYSE:S). As T-Mobile US (NASDAQ:TMUS) makes its case for buying out S stock, how should investors react?
On the surface, the merger appears to make economic and logical sense, if only because T-Mobile CEO John Legere is constantly fighting on the campaign trail. With his quirky mannerism and even quirkier fashion-sense, Legere cuts a controversial figure. Nevertheless, you can’t fault the guy for his ambitiousness.
Legere has faced a circus of attention from legislators and committees. Some of the questioning, in my opinion, borders on the ridiculous. For example, Democratic Representative Hank Johnson criticized T-Mobile executives for spending $195,000 at one of President Trump’s hotels. The implication was that Legere was subtly attempting to curry favor in his quest for Sprint stock.
Personally, I view that inference as a stretch. Consistently, the media has focused the spotlight on Trump’s possible collusion with Russia. The last thing anyone needs in this environment is more attention.
That said, Legere has redirected the media’s glare to a positive direction. Throughout telecom’s version of the Spanish Inquisition, Legere emphasized the benefits of a T-Mobile-Sprint merger. Primarily, a combined entity would upend the duopoly of Verizon and AT&T (NYSE:T). The TMUS head rightfully points out that three strong competitors are better than two contenders and two afterthoughts.
If all opposing politicians have are silly or irrelevant questions, then T-Mobile has a clear shot at acquiring Sprint stock. Unfortunately, nothing is ever that easy.
Tough Questions Plague S Stock and the Proposed Merger
From combing through various articles on the web, the consensus appears that Legere has a compelling argument. Therefore, the legal greenlight for the merger is an inevitability. But I can’t help looking at the S stock price.
Although shares are up over 9% this year, the journey has been a choppy one. Based on current levels, the S stock price hasn’t moved at all since late summer of 2016. And the fact that it lost steam in recent trades does nothing to bolster confidence in a possible merger.
On the other hand, both Verizon and AT&T are doing what they usually do: trudging along while paying their shareholders generous dividends.
But I’m getting more concerned when I consider the arguments against T-Mobile’s buyout of Sprint stock. While Legere emphasizes the broader argument that the merger will benefit society, that logic doesn’t hold up well. For instance, a combined entity would almost surely lead to job losses, particularly the high-paying kind.
The counterargument is that this reinvigorated telecom firm will make inroads to rural communities, boosting both connectivity and job growth. If anything, Fox Business has bought into this narrative as well, I suspect, as rural residents.
However, the idea that this merger will close the digital divide isn’t entirely convincing. For one thing, the buyout will take many years to complete. During that time, rural residents must settle for less-than-stellar internet speeds. In addition, unless the T-Mobile-Sprint entity encounters competition, it has no incentive to reduce prices.
On top of that, consolidation in telecom risks depressing prices in major markets, and therefore, wages. Ironically, opposing Democrats have adopted the stereotypical Republican playbook by supporting the status quo in the telecom industry.
Complicated Nature Hurts Sprint Stock
I don’t necessarily like giving my thoughts about high-level mergers. With so many gears involved, it’s difficult to predict the deal’s trajectory with any confidence.
But with S stock, you’re also talking about telecom. This is one of the most important, if not the most important sector. As we head toward true 5G integration, telecoms will touch virtually every area of our lives. From automated technologies to artificial intelligence to healthcare, this industry will lever unprecedented influence.
As such, lawmakers and regulatory agencies will go over the proposed deal with a fine comb. And when they’re satisfied with the results, they’ll do it again. Just when you think you’re through the door, an appeals process could undo everything.
I believe that’s the reason why Sprint stock has looked so unconvincing lately. In my opinion, this is far from a done deal. If you’re speculating purely on the merger, you may want to take a breather or two.
As of this writing, Josh Enomoto was long AT&T.
