Mega mergers are difficult to pull off under the best of circumstances. But in the current political environment the challenge is five times harder. Case in point, the merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S). The third- and fourth-largest wireless carriers, respectively, their merger proposal was approved by federal agencies in 2019. Naturally, the price of Sprint stock skyrocketed on the news. But the positivity was short-lived.
Although the two telecom giants cleared the federal hurdle — no small task — individual states had serious misgivings. Among the most prominent objectors were California and New York. As a result, the opposing states filed a federal suit in Manhattan. S stock took a major hit under the looming specter that the critical merger could potentially crumble.
Interestingly, the Department of Justice and the Federal Communications Commission allowed the merger to go ahead. However the plaintiff states argued that the agencies erred in their judgment, only affording a cursory look at the deal. And should the courts ultimately scrap the merger, it bodes especially poorly for Sprint’s stock price.
That’s because the pressurized fiscal conditions underlining S stock represent a key argument for the merger with T-Mobile. In its most recent quarterly earnings report, Sprint disclosed a long-term debt level of over $33 billion. With worrying net income losses and cash holdings of a paltry $4.3 billion, the situation seems untenable.
However, a combined T-Mobile-Sprint entity could legitimately challenge the wireless big dogs of Verizon (NYSE:VZ) and AT&T (NYSE:T). Furthermore, the resultant pool of resources would enable the company to invest more deeply in 5G-related next-generation technologies. That’s simply not possible if the two companies continue operating separately.
But will the federal suit favor Sprint stock?
A Legal Toss Up Clouds Sprint Stock
While both T-Mobile and Sprint make a convincing argument for the necessity of their merger, opposing states also present a strong case. The biggest concern is the anti-competitive nature of this deal.
With several big mergers already in the books, the American public is leery about additional consolidations. That’s especially true for the telecom industry, which features less competition than other sectors. From an optics perspective, shifting from four major providers to three is a huge change.
Furthermore, the fact that T-Mobile and Sprint are individually smaller than Verizon and AT&T has ironically inspired creative competitive strategies. For instance, in years past T-Mobile was a buyout target, first from AT&T and later from Sprint. Both times, efforts failed because the Obama administration implied such deals were bad for competition.
And what did T-Mobile do in response? They introduced the “Uncarrier” campaign, which MoffettNathanson analyst Craig Moffett told Washington Post reshaped the wireless industry. But if T-Mobile and Sprint merge as a giant company rivaling AT&T, the new telecom entity won’t have the same incentive to think outside the box.
Should the court have this mentality, that’s not good news for S stock.
However, a better question to ask is, what could happen if the merger falls through? In that case, it’s unlikely that Sprint will continue treading water. Instead, it may have to divest many assets and focus on being a local, rather than national, carrier. From there, who knows how S stock might fare?
T-Mobile is in a far better position than Sprint. Nevertheless, if the merger proposition fails, it will leave the wireless industry with two giants and a straggler (presuming that Sprint is relegated to the local markets). That may not be good for consumers, ultimately defeating the purpose of blocking the merger in the first place.
S Stock Too Difficult to Call Convincingly
After reexamining the issue with a clean slate, I think T-Mobile and Sprint make the more convincing argument. During this period of intense technological innovations, those who have money win. This dynamic suits Verizon and AT&T over T-Mobile and Sprint. Based on the reality of the current wireless paradigm, the merger should go through.
Trying to figure out the trajectory of Sprint stock without this merger, though, is a tough call. But adding the complexities of a tight courtroom drama? In my opinion, this is a coin toss.
For one thing, it’s not what we think that matters, but what the court decides. Investors have zero influence on that issue. Second, the price action of S stock suggests that Wall Street is pessimistic that the merger will close.
Still, it’s anyone’s guess, which is why I’m uncomfortable with Sprint stock. You can feel free to gamble on it based on the massive discount, but I would only put a small amount of capital at risk due to the ambiguity of this environment.
As of this writing, Josh Enomoto is long AT&T.