It has been a tough week for telecom giants T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S). Both firms saw their share prices drop dramatically after reports that the U.S. Department of Justice wasn’t optimistic about the firms’ proposed merger. Over the course of just a few days, Sprint stock lost more than 6% while TMUS shed about 4% of its value.
The news certainly doesn’t cast a favorable light on the future of their merge, but it may not be quite as bad as the market thinks, according to some analysts.
What Happened
Sprint and T-Mobile have been working to join forces for a few years now — the two have been at the bottom of the wireless totem pole in the U.S. and proposed a merge in order to pool their resources in order to keep up with cash-rich bigwigs like Verizon (NYSE:VZ) and AT&T (NYSE:T). TMUS CEO John Legere has been outspoken about his opinion that the merge would level the playing field within the wireless industry and disrupt the duopoly that VZ and T currently enjoy. He claims that adding a third equally sized player would ultimately be best for customers.
It appears, however, that the DoJ doesn’t quite agree — at least not with the deal that’s on the table right now. The Wall Street Journal reported that DoJ staff have said the merger looks like a no-go with its current structure. According to the WSJ, antitrust regulators are questioning whether the deal would actually be beneficial to competition in the industry and that the deal will likely be rejected unless the two amend the merger to address those concerns.
Bad News for TMUS and Sprint Stock?
The news rocked both firms’ share prices, as investors who’d been speculating that a deal would be made sooner rather than later started to panic. The CEOs at both Sprint and T-Mobile responded to the WSJ article saying it was “simply untrue,” but the damage had already been done — investors were questioning whether the deal would eventually be shut down.
If the DoJ comments are accurate, it might not be as bad as it looks. Guggenheim Partners analyst Mike McCormack pointed out that communication between the DoJ and the two firms is actually a good sign. It was unlikely that regulators wouldn’t tweak the agreement at all, and the fact that they’re willing to discuss it might actually increase the odds of approval. The sides have come together again this week to discuss it further.
From that standpoint, it’s worth bearing in mind that the deal could still move forward.
Don’t Hold Your Breath
However, even if the WSJ article is as untrue as Legere says it is, TMUS and Sprint stock are still a long, long way from seeing any benefits from a merger. That’s because a merge anytime in the foreseeable future is very unlikely. Aside from the obvious antitrust concerns that the WSJ article highlighted, the merge is likely to be under the microscope because of the telecom industry’s rising importance to consumers.
Telecoms hold the keys to a growing proportion of everyday life in America and regulators recognize that and want to protect it. 5G is gaining momentum and connectivity is playing a much larger role around the world, so regulators want to get it right when it comes to how the telecom industry operates. That means a merge of this size is unlikely to be rushed through.
So if you’re betting on T-Mobile or Sprint stock because of their merger potential, you’d better get comfortable because you’re going to be here awhile.
Buy on the Dip?
So is this a buying opportunity for TMUS or Sprint stock? Perhaps if you want to pick up T-Mobile, but for Sprint, I’d say no. The bottom line is that the merger is a long way off, if it happens at all, and this DoJ report is likely the first of many bumps along the way.
T-Mobile looks better positioned to go it alone if need be, and the company will also see a boost from a merger, so you’re better protected buying TMUS right now.
However in either case, I wouldn’t get too wrapped up in their potential future together.
As of this writing, Laura Hoy did not hold any positions in the aforementioned securities.
