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Summary

  • Sprint is said to withdraw its T-Mobile US bid due to regulatory hurdles.
  • We believed that Sprint could overcome these regulatory issues and are highly disappointed with the outcome.
  • We do not identify any short-term plan B for Sprint: SoftBank is unlikely to sell to DISH and the turnaround effort will take time with likely short-term earnings downwards revisions.
  • We cut our positive rating on the stock.

Sprint (NYSE:S) named Marcelo Claure as CEO, replacing Dan Hesse, and, according to various press reports, withdrew its bid for T-Mobile US (NYSE:TMUS). This suggests that SoftBank (OTCPK:SFTBY) did not succeed in convincing the regulator of the merits of the proposed deal and is now focusing on turning around Sprint.

In our June 6 article, we said that a Sprint - T-Mobile merger could overcome regulatory hurdles and that the risk/reward on the stock was consequently attractive. There's not much to say, we were overly optimistic on the regulatory outcome (Sprint worth $14 in a bull case) while our worst-case valuation (Sprint worth $9 as a standalone company) has been affected by the declining confidence in the group's EBITDA guidance. Sprint left the guidance unchanged after reporting calendar Q2 but suggested that this did not include the potential impact of a pricing change (which is likely by year-end). Unfortunately, we do not identify any short-term plan B for Sprint. Indeed, SoftBank is unlikely to sell now to DISH (NASDAQ:DISH) in our view: it's been only one year that SoftBank took control of the carrier for a price close to the current price and DISH has the opportunity to buy T-Mobile US which is in a better shape.

In all, SoftBank has no choice but to turn around the company. A fresh leadership will help. But obviously, it will take some time as Sprint continued to lose postpaid subscribers in Q2 and has to fix its network and its price plans which are not competitive. As we said above, should the price plans be reset, the EBITDA guidance would probably be cut. This does not make a compelling short-term investment case and prompts us to cut our positive rating on the stock.

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Source: Update: Sprint - A New Era Without T-Mobile