Is Three Still Value In T-Mobile?

Aug.26.14 | About: T-Mobile US, (TMUS)


Although a Sprint deal is off the table, there's still other suitors.

There's a motivated seller in T-Mobile's parent company.

And there's plenty of value in T-Mobile's business model given its industry-changing initiatives.

Sprint (NYSE:S) is done with T-Mobile (NASDAQ:TMUS), but the stock has held up fairly well. Sprint is down over 30% since the announcement that it was passing on T-Mobile. However, shares of T-Mobile are only down some 12% over the last month.

Even after the deal fell apart, T-Mobile CEO John J. Legere took to Twitter to revive the competition between the two companies. But it looks like Legere might be cocky for a reason. With its 2013 acquisition of MetroPCS, T-Mobile has turned itself into a viable number 4 player in the U.S. wireless industry. With the strength the company is seeing, could it in fact do without merging?

It appears that Sprint needed to merge more than T-Mobile. Sprint continues to lose customers, despite its efforts to boost its network by forking out billions in network upgrades.

Government regulators have made it clear that they would oppose any combination of any two of the four biggest wireless carriers, with the FCC chairman noting that four national wireless service providers benefit American consumers. That doesn't mean T-Mobile won't be sold to someone else.

Deutsche Telekom, which owns two-thirds of T-Mobile, would like to exit the US market and the Sprint transaction would have provided a speedy one. T-Mobile has attracted takeover interest because it has managed to grow its customer base nicely with aggressive marketing. Already, French mobile operator Iliad has offered $15 billion for 56.6% of the company and satellite TV operator DISH Network has hinted that it also may be interested.

Any hope left?

A number of telecom giants have expressed interest in the takeover in the past to no avail, including AT&T (NYSE:T) in 2011 and now Softbank and Sprint. Iliad has said its recent bit is a substantial premium over the price before market rumors took effect. Estimates had placed the Sprint at $40 per share.

AT&T had to pay breakup fees totaling an estimated $4 billion, with Sprint's breakup fee expected to be between $1 billion and $2 billion. We look for T-Mobile to put that money to work, further growing its market share, much like it was able to do with the $4 billion from AT&T.

Deutsche Telekom does not favor the Iliad bid because the lack of presence in the United States would add no value to T-Mobile. However, Iliad does have an advantage - the fact that it has no U.S. operations means the bid would not be blocked on antitrust grounds. DISH Network has an even bigger advantage because it is a domestic U.S. company with no overlapping interests in telecommunications.

In terms of numbers of subscribers, the company now ranks first in the country in terms of prepaid wireless plans and fourth in terms of postpaid plans. The company has been able to use its relatively small size to catalyze growth over the last few quarters. The beauty of T-Mobile is that its no-contract model is gaining traction. This has helped put the industry in upheaval. 2Q saw double-digit profit growth.

Bottom line

Shares trade at 7.6x EV/EBITDA, above the other major wireless telecoms. But T-Mobile remains in play. Its parent company Deutsche Telekom has a lock up period through November 2015 in that it can't sell its shares. But it appears it has a long-term strategy of exiting the U.S. market. That means M&A traction is the likely outlet. Its parent company, Deutsche Telekom, did reject the Iliad offer, but DISH could still be a suitor. DISH got left out when AT&T decided to pursue DirecTV (DTV).

Look for T-Mobile to be a buyout candidate in the next few months, but if not, it's still positioned to continue eating Sprint's lunch, possibly getting to the point that it's a major competitor to Verizon and AT&T.

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.