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T-Mobile-Sprint Merger on the Anvil: Winners and Losers

Zacks

According to a report by The Wall Street Journal, T-Mobile US Inc. TMUS and Sprint Corp. S have recently expressed renewed interest for a possible merger. Notably, this will be the third instance that the companies are negotiating the merger.

Ever since President Trump came to power, the telecom industry circle has been rife with speculations that the Trump regime may pave the way for a merger between the two companies mentioned above. It is to be noted T-Mobile US and Sprint are the third and fourth largest national telecom operators of the United States, respectively.

Change in Regulatory Stance to Aid M&As

The previous administration under Barack Obama was strictly against further consolidation of the U.S. telecom industry. The U.S. telecom regulator Federal Communications Commission (“FCC”) firmly stated that it wanted at least four powerful national telecom operators in the country.

However, the newly restructured FCC under Trump’s presidency has given enough indications of its leniency compared with the Obama administration. The FCC is most likely to roll back a slew of stringent regulations of the previous regime. The FCC’s stance of being less restrictive will aid mergers and acquisitions.

Why did Earlier Attempts to Acquire T-Mobile Fail?

In 2011, AT&T Inc. T placed the first bid of $39 billion for gaining full control of T-Mobile US. After a close inspection, the FCC thwarted AT&T’s attempt to acquire T-Mobile US, stating that it seeks a minimum of four national carriers in order to maintain competitiveness.

In July 2014, Sprint offered $16 billion for a little over 50% stake in T-Mobile US. The deal was thoroughly evaluated by both the FCC and the U.S. Department of Justice with the regulators coming to the same conclusion again. Consequently, Sprint opted out of the race. Sprint and T-Mobile US once again negotiated in last year which broke down on November over the leadership dispute of the merged entity.

The Winners

Both T-Mobile US and Sprint will benefit significantly from the proposed merger. At present, Verizon Communications Inc. VZ and AT&T together control around 68% of the U.S. wireless market. The merged entity with around 32% market share will be a formidable challenger to both Verizon and AT&T. Yesterday, stock prices of Sprint and T-Mobile US jumped 17.1% and 5.7%, respectively.

Notably, Verizon and AT&T will also benefit as these two large telecom carriers were facing severe pricing pressure from unlimited data offerings of T-Mobile US and Sprint. If these two companies merge then Verizon and AT&T will face lesser competition and won't have to invest as much in marketing and promotions to retain subscribers. A decrease in promotional expenditure will raise their operating margins. Share prices of Verizon and AT&T increased 2.9% and 1.8%, respectively, following the news.

The Losers

Major losers of the proposed merger will be wireless tower operators like American Tower Corp. AMT, Crown Castle International Corp. CCI and SBA Communications Corp. SBAC. Yesterday, these three stocks plunged by 4%, 4.8% and 5%, respectively.

Consolidation of telecom operators generally results in lower capital spending. T-Mobile US and Sprint being facilitated by the same wireless tower operators to install their cellular networks. However, a merger of these two will result in elimination of many overlapping towers and consequently, tower operators will lose on lease rentals.

The chart below depicts the price performance of T-Mobile US and Sprint year to date.


Both Sprint and T-Mobile US currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bottom Line

The U.S. telecom market continues to witness intense pricing competition, as success to a great extent depends on technical superiority, quality of services and scalability. Moreover, the competition is likely to intensify further in the U.S. wireless industry in 2018 with the entry of cable MSOs (multi service operators). The proposed merger of T-Mobile US and Sprint will enable the consolidated entity to strengthen its foothold.

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