The pending merger of T-Mobile (NASDAQ:TMUS) and Sprint Corporation (NYSE:S) is the only big catalyst that will drive shares of the latter. The flip side is that the companies are still waiting for the approval conditions from the Justice Department. The risk for S stock is that the latest ask from the DOJ could potentially derail the deal.
On May 20, the FCC approved the merger, provided the combined firm provide expanded 5G coverage. The firm would have three years to offer coverage to 97% of the U.S. population and 99% of the population within six years.
On May 29, Bloomberg reported that top department officials want the two companies to set the groundwork for a fourth carrier. If fulfilled, DOJ will approve the $26.5 billion deal. The condition doesn’t make much sense. People familiar with the matter said that Altice USA Inc. will enter the wireless market. It will offer wireless service for half the monthly rate of rivals (at $20 – $30 a month) and running on Sprint’s mobile network.
Altice may offer such a low rate because the service will rely on the customer’s Wi-Fi service and the company’s network of hotspots.
More Competition on the Way
Many national and regional cable companies, including Dish Networks Corporation (NASDAQ:DISH), are planning to offer wireless services. And to meet the FCC requirements to get the deal done, Sprint will sell Boost Mobile. Amazon (NASDAQ:AMZN) is rumored to be considering buying Boost, although this sounds unlikely. Amazon would need to raise $3 billion by selling stock and raising debt. It could offer a mobile service to the existing 8 million customers. But if Amazon favors offering its own mobile services over others, it may raise antitrust concerns.
Two Dominant Players with a Third on the Way
AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ) fell 4% and 4.36%, respectively, on May 30 when rumors circulated that Amazon would enter the wireless market. Investors could assume the e-commerce juggernaut will not enter the market and that the two telecom firms will continue to dominate the industry. In effect, the sudden drop in AT&T and Verizon stock created another entry point for income investors seeking a growing dividend. AT&T’s stock has a dividend yielding 6.59% after closing yesterday at $31.09 while Verizon’s stock dividend yields 4.21%.
Sprint’s 5G Catalyst for the Merged Firm
Sprint will offer 5G services to nine major cities in the United States, including Chicago, Atlanta, Kansas City, Los Angeles, New York, and Phoenix. The faster service should lift Sprint’s wireless services revenue, which, at $22.5 billion, is flat from FY 2017 but down from FY 2016’s $23.8 billion. Average revenue per user (ARPU) of $44.54 fell steadily in the last two years but could increase with customers signing up for 5G services.
Valuation Sans Buy Ratings
With the merger pending, investors may not want to pay much attention to Wall Street’s price target on Sprint stock. With no buy ratings and five holds, the average price target is $5.88, according to TipRanks. This suggests the stock has downside risk of 14.4%. Investors need only bet that the $26.5 billion deal goes through but what Sprint shareholders get depends on where T-Mobile is trading. For example, on May 21, S stock was worth $7.73. But after TMUS stock fell by more than 3% last week to $73.44, Sprint stock is worth 0.10256 x $73.44, or $7.53 a share.
Your Takeaway on Sprint Stock
The government could impose tougher conditions before allowing the deal to go through. This creates uncertainties for investors holding either T-Mobile or Sprint stock. Still, the companies remain attractive speculations in the near-term. For investors who prefer steady income instead, AT&T and Verizon are worth considering, too.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
