Profiting Off The Justice Department's AT&T/T-Mobile Announcement

Includes: DTEGY, S, T, VZ
by: Investanomics

The Department Of Justice's announcement regarding the AT&T (NYSE:T) and T-Mobile (OTCQX:DTEGY) buyout have caught many investors off guard. Many investors expected the merger to be approved by the government, which would create the largest wireless carrier based on subscribers. Many analysts thought asset divestitures by AT&T would be enough to gain government approval. What analysts failed to consider was the amount of divestitures required to gain approval.

AT&T and T-Mobile compete head-to-head in 97 out of the 100 largest cellular markets in the nation. The Department Of Justice feels that any T-Mobile and AT&T merger would harm consumers through higher prices and less innovation in the industry. In order to convince the Justice Department to reconsider, AT&T would have to create a package where any divestiture and restructuring would not change the current wireless climate. This, of course, is impossible and will end up in litigation.

Here is how to play the Justice Department announcement:

AT&T (T) - This deal will not damage AT&T in the long run. AT&T may ultimately be forced to pay the $3 billion breakup fee, as well as transfer spectrum and other assets. This will not be a big blow to the company overall. I view any selloff as an opportunity to purchase shares at a good price. I don't believe that AT&T's 6% dividend yield is in danger because of this deal. AT&T should be able to maintain its current dividend payout with no problem.

Verizon (NYSE:VZ) - Verizon has remained relatively quiet since the Justice Department announcement, opting to remain neutral. This announcement should not have any effect on Verizon's business. I'm bullish on Verizon shares and believe their 5% dividend is an excellent place for investors looking for that steady yield.

Sprint (NYSE:S) - Sprint shares have rallied 6% on the announcement by the Justice Department. Sprint fought vigorously against this deal and got what they wanted. Sprint now thinks it might be able to work out a deal with T-Mobile; this would bring them one step closer to being a major threat to AT&T and Verizon. A merger between Sprint and T-Mobile will not happen. Sprint and T-Mobile use two different networks, this will cause the same issues that Sprint is trying to fix from its previous merger.

Sprint is in a very difficult situation being forced to rely on Clearwire (CLWR) to build out the 4G LTE network that Sprint customers use. If Clearwire were unable to secure the $600 million to continue building out the network, Sprint could be left out in the cold. Keep an eye on Clearwire and if it's unable to secure the investment, then both companies would not be able to compete against the other carriers. I would short Sprint and Clearwire at that point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.