Sprint’s chairman is reportedly ready to do a deal with T-Mobile US as soon as the U.S. spectrum auctions conclude, but analysts are not confident the two companies will merge this year, citing timing and possible resistance from Washington as factors that could delay or derail a deal.
“It seems clear that Sprint will try again to merge with T-Mobile. The question is whether T-Mobile will be interested, at least right away,” said analyst Craig Moffett of MoffettNathanson. “Sprint’s financial position is deteriorating again, and they have once again slashed spending on their network, so they need a deal, and the sooner the better. But T-Mobile has time on its side; the longer they wait, the better the deal they will be able to strike.”
Moffett said T-Mobile US can probably delay a deal without worrying that a cable operator or another bidder will swoop in to try to buy Sprint.
“Sprint’s extreme overvaluation makes it unlikely any other acquirers would come knocking,” Moffett said. “T-Mobile has time on its side.”
Not all analysts see Sprint as overvalued. Wells Fargo Securities expects Sprint stock to outperform the overall market in the months ahead, a forecast based partly on the value of the company’s rich spectrum portfolio.
“Sprint’s assets will become more strategic as we move into the 5G era. With the change in administration, this point in time came sooner rather than later,” wrote Wells Fargo debt analyst J.Davis Hebert in a recent research note.
Herbert agreed with Moffett on the chance of a cable operator making a bid for Sprint.
“At this point, we do not believe cable makes a play for wireless in 2017, and that outcomes are perhaps still more tilted toward an attempted merger with Sprint or Dish,” Herbert wrote, adding he foresees a merger attempt, but not necessarily a deal.
“We fear that the market may be getting too comfortable with the chances of this deal getting done,” Herbert wrote.
Would the Trump administration support a merger?
The new federal administration is seen as more supportive of mergers and acquisitions than the past administration was, but a Sprint/T-Mobile US combination might face some resistance, according to analyst Walt Piecyk of BTIG Research.
“We … can’t simply ignore Sprint CEO Marcelo Claure’s public support of Hillary Clinton or the twitter battle that T-Mobile CEO John Legere engaged in with the President-elect a year ago,” Piecyk wrote in a research note. “There have been some press reports that have discussed the propensity of the new administration to settle old scores.”
Piecyk also notes President Donald Trump’s senior adviser, Steve Bannon, could balk at a merger if it seems likely to result in job cuts.
“Job loss and rising prices are clearly populist issues and a Sprint/T-Mobile merger could threaten both,” said Piecyk. “Analysts may use the standard labels of cost synergies and a ‘more rational pricing environment’ but Bannon, an ex-banker, knows what those terms mean to his base.”
Even if the two wireless carriers make guarantees about protecting jobs, they cannot fully control the impact a merger could have on the many vendors and service providers that they share. The purchasing synergies that could result from a merger could mean lower revenues and lost jobs at suppliers to Sprint and T-Mobile US. However, those impacts might not be immediate. In the near term, Piecyk thinks a merger could drive “incremental investment” in the two wireless networks.
“There is clearly a cost to realizing cost synergies as both low-band and high-band spectrum would need to be deployed more pervasively,” Piecyk wrote. “Redundant cell sites with multiyear contract terms would need to be reduced. However, even with Sprint’s reduced capital investment plan, it does not appear the combined company would need to make a material increase in their combined capital investment plan, excluding the incremental investments required to realize the synergies mentioned above.”
Good for the industry?
Both Moffett and Piecyk argue a Sprint/T-Mobile US merger would improve stability in the wireless industry by creating a third carrier with the resources to compete with Verizon Wireless and AT&T Mobility. One could argue T-Mobile US and Sprint are already doing a good job of competing with the larger carriers, but they compete by cutting prices. Price wars are good news for consumers, but over time they can erode profits, which will decrease investment in the networks.
The combination of T-Mobile US’ marketing machine with Sprint’s spectrum would clearly change the U.S. wireless landscape. Analysts believe it would definitely decrease spending by the two companies. Piecyk estimates a merger would create $30 billion in synergies.
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