Iliad's Acquisition Of T-Mobile Could Leave Sprint Up For Grabs

Aug. 4.14 | About: Sprint Corporation (S)

Summary

If Iliad can acquire T-Mobile, Sprint will be left with few options.

Sprint’s subscriber base is shrinking and its share price is falling.

The declines could leave Sprint vulnerable to acquisition.

Sprint (S) has been in talks to buy T-Mobile (TMUS) for more than six months according to the Wall Street Journal (subscription required) - but a new suitor for T-Mobile and declining subscribers at Sprint could shake things up.

French telecom Iliad (ILD.FR) offered $15 billion in exchange for a majority share in T-Mobile on Thursday. "Officials from Japan's Softbank, which bought Sprint last year, have made the case that a merger is the only way for the two companies to compete with AT&T and Verizon," writes the Wall Street Journal. Iliad obviously disagrees. FCC Chairman "Wheeler and the Justice Department have made it clear they are against any merger that would reduce the number of nationwide competitors in the wireless industry," so a Verizon (NYSE:VZ) or AT&T (NYSE:T) acquisition of Sprint is unlikely.

INVESTMENT THESIS

If the deal with Iliad and T-Mobile goes through, Sprint will have few options left. The wireless carrier, which ranks third in the US, is in a weak position. It is losing subscribers and it is showing on the company's bottom line. In order to remain competitive, Sprint will either have to buy up smaller companies and assimilate their subscribers to build market share or risk being bought by a larger company like Dish (DISH).

SPRINT LOSING SUBSCRIBERS

According to ZDNet, Sprint had 53 million subscribers at the end of 2Q14, and its declining. The company lost 245,000 subscribers in 2Q14 and 383,000 in 1Q14. At the same time, ATT and Verizon were tied for wireless subscribers at the end of 1Q14, owning roughly 34% of the market each, and T-Mobile is rapidly gaining market share. The wireless provider had 14% of the market at the end of 1Q14 and 50 million subscribers at the end of 2Q14, and is growing by leaps and bounds. T-Mobile added 1.5 million subscribers in 2Q14, making the fifth quarter in a row the company has added over one million subscribers thanks to inventive promotions like free music streaming on smartphones.

In other words, Sprint's subscribers are declining while T-Mobile's subscriber base is growing.

Sprint surprised on earnings in 2Q14, posting an earnings per share of $0.01, beating consensus estimates of a $0.04 decline, but T-Mobile is much stronger. The company surprised on its recent earnings, posting a net profit of $391 million, or $0.48 per share, up from a loss of $0.19 per share in 1Q14 - and making an acquisition of T-Mobile by Sprint that much less likely.

ENTER DISH

Dish offered to buy Sprint last year, but was ultimately beat out by Softbank (OTCPK:SFTBF). It had offered $7 per share, representing a 12.5% to Sprint's share price at the time. But Dish was not dissuaded. In March, Dish won a wireless spectrum auction, buying 10 megahertz of wireless spectrum and increasing its holdings to 56 megahertz. Including this transaction, Dish has spent over $5 billion on such acquisitions since 2007.

Right now, Sprint is trading around $7.45 per share - a 31% decline YTD. If it goes much lower, Sprint will be right in Dish's price range.

Moreover, Dish is facing a deadline. In 2012, "The FCC said Dish Network must cover at least 40 percent of the population in areas covered by its spectrum with a wireless network in the next four years, or face penalties," writes FierceWireless. "Further, the FCC said Dish must cover at least 70 percent of that population within seven years."

And, it's not as if Sprint and Dish aren't friendly. In December, Sprint partnered with Dish to test offering wireless service in Texas. "With millions underserved by inadequate broadband, the potential to bring a high-speed fixed wireless solution is very compelling to both Dish and Sprint," said Tom Cullen, Dish executive vice president of corporate development. "We both bring distinct skills, not the least of which for Dish is a workforce of professional technicians who visit thousands of homes every day performing professional installations for both video and broadband." The service is expected to launch this year.

TAKEAWAY

Dish is in a good position to make an acquisition, and Sprint is a great target once T-Mobile is off the table. It would help Dish gain a strong foothold in the wireless market and allow the company to offer the sort of bundled services that its rivals are using to deliver additional value to subscribers - and the price is almost right.

This is still a wait-and-see position, but if Iliad succeeds in its acquisition of T-Mobile, Sprint's opportunities to remain competitive will decline - and Dish will be in a position to renew its efforts towards buying Sprint and becoming the third largest wireless carrier in the US.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.