MetroPCS To Merge With T-Mobile; Will It Hurt Other Carriers?

Includes: AAPL, DTEGY, S, T, TMUS, USM, VZ
by: Valuentum

Mobile phone carriers MetroPCS (PCS) and Deutsche Telecom's (OTCQX:DTEGY) T-Mobile USA will merge to form a bigger, fourth-largest carrier in the U.S. As you may have gathered, T-Mobile is already the fourth-largest carrier, but the new carrier will now possess 42 million subscribers and retain the T-Mobile name. We're not at all surprised by this merger, as we noted last week that smaller carriers were likely unable to compete with cash-rich Verizon (NYSE:VZ) and AT&T (NYSE:T). For a read on why we think Verizon is one of the best dividend-growth stocks out there (due to its cash-flow characteristics), please click here.

We believe it will be vital for the company to begin selling the iPhone (NASDAQ:AAPL) if it wants to mitigate subscriber losses, and the merger could give the company the necessary cash flows to invest in the popular device. We've seen how the iPhone essentially saved Sprint (NYSE:S), and we suspect it could do the same for the new T-Mobile. We don't think either MetroPCS or T-Mobile caters much to the customer that wants to spend $200 on an iPhone 5 upgrade, but we could see subscribers flocking to the 4 and 4S at meaningfully lower price-points.

Though MetroPCS was early in rolling out its 4G LTE network, some have pointed out that its network mainly registers 3G speeds, meaning its existing spectrum is overrated. Regardless, T-Mobile has significantly lagged Verizon, Sprint, and MetroPCS in its 4G LTE adoption, so we view it as a positive that the firm will be able to expand its spectrum footprint.

Ultimately, we don't think the deal will hurt Sprint, AT&T, or Verizon in the near-term, but it could certainly be considered another nail in the coffin for smaller regional players like US Cellular (NYSE:USM) and Leap Wireless (LEAP). These smaller firms don't have ample marketing budgets or network coverage to compete with the big four carriers, in our view. However, smaller firms have a chance of being acquired, whether it is for the acquirer to gain more subscribers or incremental wireless spectrum. We'll be watching spectrum-network Clearwire (CLWR), as we think large carriers, particularly Sprint, could turn to the network to boost capacity.

All things considered, consolidation should benefit the entire wireless industry, since its oligopolistic structure should lead to better overall pricing (even if marketing intensifies). We expect overall economic profits for the industry to increase. Still, we aren't interested in adding any carrier to either of our actively managed portfolios at this time, as we're comfortable with our current technology exposure at this time.

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

Additional disclosure: Some of the firms mentioned in this article are included in our actively-managed portfolios.