Until FCC chair Ajit Pai spoke on May 20, Sprint (NYSE:S) stock had been stuck at $6 for over a year. That’s because in April, 2018, T-Mobile (NASDAQ:TMUS) offered $6.62 per share to buy it. The all-stock deal was struck with T-Mobile at $64.52 per share. At the May 17 opening price of $75.38 for TMUS, the buyout is now worth $7.73 per share.
But none of that matters if the deal isn’t done. Sprint was practically begging regulators to sign off on it in its latest quarterly report. On May 21 there are conflicting reports about the Department of Justice’s attitude, some saying it’s a yes, others a no.
Pai’s signal that he would support the merger S stock up more than 20% as trading opened yesterday, and it kept most of those gains, closing at $7.34. But T-Mobile also rose, so Sprint’s value on May 21 is over $8 if the buyout goes through.
Sprint Without T-Mobile
Sprint lost 189,000 postpaid subscribers during its most recent quarter, along with $2.17 billion, 53 cents per share. It’s the kind of news most companies bury in a press release. Sprint highlighted it.
Without T-Mobile, Sprint still generated $10.4 billion in operating cash flow during fiscal 2019, ending the year with over $7 billion in cash. Sprint also reduced its debt by $2 billion during the year, to $35.36 billion, against assets of $84.1 billion.
The problem is that Sprint must invest heavily to justify its spectrum investment and prepare for 5G. The company spent nearly $5 billion on the network during the year, up from $3.3 billion, so total free cash flow for the year was negative $914 million.
InvestorPlace’s Chris Lau notes that this means the company’s plan for installing smaller cells on phone poles instead of leased towers continues. Some 30,000 have been deployed so far, meaning 80% of its precious 2.5 MHz spectrum is now sectorized in this way.
But most analysts are taking the company line that Sprint’s prospects are grim unless the deal gets done. Comcast (NASDAQ:CMCSA), which has been selling WiFi-based mobile under its Xfinity brand, could step in, but probably at a lower price than T-Mobile is paying.
Sprint made other mistakes during the last decade, going with WiMAX technology instead of LTE for 4G service, writing off $30 billion in shutting the old Nextel network, and sitting out the 600 MHz auction in 2016, leaving it without low-band spectrum.
If the deal is cancelled, some see the stock going to $3.
T-Mobile Without Sprint
Without Sprint, T-Mobile still looks healthy. Its own quarterly report showed net additions of 1.7 million and net income of $908 million, $1.06 per share, on revenues of $11.08 billion. T-Mobile also cut its long-term debts during the year, from $12.1 to $10.95 billion, and reported positive free cash flow of $618 million.
But many of T-Mobile’s expansion plans have been frozen in place by the merger, whose deadline was extended again at the end of April. The Justice Department said only “the investigation continues” and merger opponents said the companies haven’t shown it to be in the public interest.
Odds that the deal goes through are now little more than 50-50 even though T-Mobile is already handing out big chunks of stock to executives in anticipation.
Who Else?
My guess is that, after a few drinks, you’ll find AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) lobbyists chortling over this. The failure of this merger to launch would leave them each holding one-third of the U.S. wireless market, a dominant position against two much-smaller rivals.
On the other hand, if the deal is rejected a larger company, like Alphabet (NASDAQ:GOOGL) or Amazon (NASDAQ:AMZN), could decide Sprint is cheap at $12 billion, its market cap at $3 per share. That would make the phone giants choke on those chortles. Despite their size and financial strength compared with Sprint and T-Mobile, the phone giants are tiny next to the likes of FANG.
But you can’t invest in fantasy. I will stay away from Sprint until there’s more clarity. The best news is clarity should come soon.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and AMZN.
