It has been just over a week since the merger between Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) passed one of its last legal hurdles. The third and fourth-largest mobile carriers in the U.S. are set to combine, after a federal judge ruled against 14 state attorneys general who had sued to stop the deal.
When the ruling was announced on Feb. 11, Sprint stock skyrocketed, gaining 77.5% on the day. It has continued to climb since, closing at $9.17 on Tuesday to notch another 5.5% gain.
The merger is expected to close on April 1, however it is still not a done deal. There is one remaining legal obstacle: the California Public Utilities Commission. In addition, T-Mobile is pushing for more favorable terms.
Big Legal Win Means Big Boost for Sprint Shares
The original deal between T-Mobile and Sprint expired on Nov. 1, 2019. At that time, the merger between the mobile carriers was in limbo. Fourteen state attorneys general — led by New York — had sued to prevent the merger, claiming the deal would end up harming consumers. While the court case dragged on, it was reported that T-Mobile was in talks with Sprint to renew terms of the deal.
The federal court’s Feb. 11 ruling in favor of Sprint and T-Mobile caught many by surprise. And it lit a match under Sprint’s stock price which rose from $4.80 the day before to $8.52, for a 77.5% one-day gain.
However, Sprint’s pricing does not reflect its performance. Bloomberg reports that the mobile carrier’s churn rate has increased to nearly 2%, with roughly one quarter of its subscribers quitting every year. That gives T-Mobile leverage to push for better terms in a new deal, despite the big jump in Sprint’s valuation.
California Public Utilities Commission
Besides the need to come to terms on a new deal, the merger still has to get past the California Public Utilities Commission. According to the New York Times, the commission has the power to block the merger, but is more likely to approve it based on conditions. These might include service guarantees and fee freezes for California residents, as well as protection for workers whose jobs could be at risk.
Either way, the California Public Utilities Commission should issue a conditional ruling within several weeks.
Bottom Line for Sprint Stock
At its current price near $9.50, much of the potential gain may already be priced into Sprint stock. After Sprint’s performance on Feb. 11, Barron’s calculated the stock’s value under the existing deal at approximately $9.75 per share.
However, because of the lawsuit filed by the state attorneys general, the deal’s original deadline for completion has passed. That opens the door to renegotiation of terms, and T-Mobile is reportedly pushing to do just that. There is speculation that T-Mobile will leverage Sprint’s poor operational performance to squeeze a lower price than had originally been agreed upon.
As InvestorPlace’s Dana Blankenhorn points out, if you bought Sprint shares before Feb. 11, you are sitting pretty. Assuming this merger gets past the California Public Utilities Commission intact, and the two companies come to terms, you should do very well. But at the current price of Sprint stock, an investment now has a lot less potential upside.
Plus, there is still some risk the deal could fall through, which would be catastrophic. That’s especially true considering Sprint shares were trading at less than half their current value just two weeks ago.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.