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Tue, October 20 at 4:00PM ET

Why Sprint Stock Has Even Further Upside

The last legal hurdle in the Sprint/T-Mobile merger is passable. S stock will rally towards $8-plus prices.

After 15 months of lobbying and negotiations, T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) have finally secured both FCC and DoJ approval for their proposed merger. In response to the DoJ putting their stamp of approval on the merger, Sprint stock rallied from $7 to $8, as investors priced in a higher likelihood of the deal actually going through.

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But, the T-Mobile/Sprint merger — which promises to forever alter the wireless industry by reducing the number of relevant and important players in the space from four to three — isn’t out of the woods just yet.

Normally, all you need for a big M&A deal to close is FCC and DoJ approval. T-Mobile and Sprint have that. What’s the hold up? A lawsuit from over a dozen state attorneys general who — despite FCC and DoJ approval and concessions from Sprint regarding their prepaid business — remain concerned that consolidating the wireless industry to three players presents a huge risk to consumers.

Fortunately for T-Mobile and Sprint shareholders, this last legal hurdle for the merger is the most passable of any of the hurdles this merger has faced so far. As such, it seems very likely that this lawsuit will be settled soon, and that T-Mobile and Sprint will finally and officially merge.

In that event, Sprint stock still has more upside left. If the deal were to go through today, Sprint stock would be taken out around $8.40. Sprint stock currently trades hands below $8. Thus, there’s reason to stay long Sprint stock.

T-Mobile/Sprint Merger Will Pass This Last Hurdle

It is increasingly likely that the T-Mobile/Sprint merger will pass its final legal hurdle, and that the two companies will close their merger within the next few months, if not weeks.

There are two big ideas here. First, a lawsuit from a dozen or so attorney generals (AGs) amounts to a very passable hurdle relative to gaining DoJ and FCC approval. Second, the validity of the anti-competitive arguments from these AGs seems to have been eroded by Sprint’s prepaid business concessions.

On the first point, historically speaking, there have really only been two blockers when it comes to proposed M&A. Either the proposed deal doesn’t win DoJ approval, or it doesn’t win FCC approval. I cannot recall a major merger in recent memory that was blocked by a lawsuit from AGs after winning both FCC and DoJ approval. Right now, the T-Mobile/Sprint merger has both. Thus, history says that this last legal hurdle is something that will most likely be resolved in a short time.

On the second point, T-Mobile and Sprint won DoJ and FCC approval by making certain concessions so as to ensure the existence of a viable fourth player in the wireless industry. Sprint has to divest its prepaid business (Boost Mobile, Virgin Mobile, and Sprint prepaid) to Dish (NASDAQ:DISH), and T-Mobile has to provide Dish with robust access to the T-Mobile network for the next seven years. Thus, this deal is supposed to birth a new, low-price competitor in the wireless industry, which erodes the validity of the anti-competitive arguments against the merger.

It seems very likely that within the next few weeks or months T-Mobile and Sprint will officially close their proposed merger.

Sprint Stock Has Upside to Above $8

In the event T-Mobile and Sprint do close their proposed merger within the next few weeks or months, then Sprint stock has tangible upside to levels well above $8.

The merger is a stock deal, wherein Sprint stock shareholders receive some fraction of T-Mobile shares for each share of Sprint they own. That fraction is 0.10256. Thus, when this deal closes, one share of Sprint will be equal to 0.10256 shares of T-Mobile.

T-Mobile stock currently trades around $82. If the deal were to close today, Sprint stock would be taken out at roughly $8.40. But, T-Mobile can and should head higher the closer the company gets to closing the deal, since the closing of such a deal will improve the company’s long-term revenue and profit growth prospects.

The 52-week high price on T-Mobile stock and the consensus sell-side price target are both around $85. Thus, it seems reasonable to assume that when this deal does close, T-Mobile stock will rise towards $85. If so, Sprint stock will get taken out around $8.70.

Either way, both $8.40 and $8.70 are substantially above Sprint stock price today, which is below $8. As such, there’s reason to remain bullish on Sprint stock for the foreseeable future.

Bottom Line on S Stock

The merger will close soon. The last remaining legal hurdle — a lawsuit from over a dozen state AGs — is just noise. As all noise does, it will pass. When it does, T-Mobile and Sprint will close their merger. And, when that happens, Sprint stock will rally to levels substantially above $8.

As of this writing, Luke Lango was long S. 

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