Why AT&T Deal Is Not the End of the World for Sprint

Includes: S, T
by: Hedge Fund Live

After the announcement earlier this week of AT&T (NYSE:T) and T-Mobile’s (OTCQX:DTEGY) merger, Sprint (NYSE:S) took a nose dive as investors quickly foresaw that this would result in lower margins for Sprint and tougher competition and ultimately, fewer customers.

First off, the merger faces a lot of obstacles; the FCC will have to approve the different parts of the merger. Even if some parts are passed and AT&T is allowed to merge with bits and pieces of T-Mobile, the result would not be the end of the world for Sprint.

1st Scenario: PASSING OF MERGER: This would result in 3 giant wireless telecom companies - AT&T leading the way with market share, Verizon (NYSE:VZ) second, and Sprint third. Worries and concerns stem from an oligopoly having the power to set prices. I would like to note that if this is the case, this will actually be beneficial to Sprint.

The reason for Sprint’s negative income right now is due to the fact that it is providing services at a discount. It seeks customers who do not wish to pay for Verizon’s premium. In essence, if AT&T and Verizon look to raise prices, people will either begin to flock to Sprint, thus increasing their customer base; or Sprint will have the ability to raise prices along with the other two service providers, thereby increasing margins.

2nd Scenario: FAILURE OF MERGER: This would obviously be one of the best outcomes for Sprint. Note, unlike T-Mobile, Sprint’s customer base and retention rate is actually positive. In the month of February, they are showing a growing customer base, whereas T-Mobile is only maintaining a minimum retention rate. It seems as though Sprint’s cheap services, attractive new line of phones and serious marketing has paid off; the next few months will be more telling whether this positive sign of growth was a hiccup or a trend.

3rd Scenario: Sprint M&A with Verizon: Although Verizon has openly commented that they hold no interest in merging with Sprint, it is certainly not impossible. Verizon may seek to buy Sprint which will mean a nice premium, after synergies are calculated, for Sprint shareholders. Verizon has two motives for doing this, the first is to block AT&T’s merger with T-Mobile. If the FCC approves one, they are likely to approve the other and vice versa. If they block one, they will most likely block the other. Verizon’s second motive is simply to keep pace with AT&T’s market share jump. Note: The probability of this scenario panning out is very low.

4th Scenario: Other M&A: There are quite a few minor wireless service providers remaining in the field, albeit microcaps worth only a couple hundred million at most. It is essential we are aware of their combined network power. Sprint also has motive to seek a merger with another wireless company such as LEAP, MetroPCS (PCS), or even smaller and more rural ones such as FTR and ALSK. Note: The probability of this scenario occurring is unknown, although I would like to say that while it is low, it remains a possibility should the FCC seriously consider AT&T and T-Mobile’s deal.

Disclosure: Long S

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