5 Reasons Sprint Can Thrive Despite AT&T/T-Mobile Hookup

Includes: AAPL, S, T, VZ
by: Chad Brand

Industry pundits and stock market investors are likely going to be largely negative on the future prospects for Sprint (NYSE:S) after this weekend's announcement of AT&T's (NYSE:T) deal to buy T-Mobile USA for $39 billion. Sprint had been rumored to be discussing a deal with T-Mobile, which would have made it a stronger number three player in the U.S. wireless phone market. There are reasons, however, to think that Sprint's turnaround can continue even without a mega deal of its own. Below are five of them.

One Less Major Competitor

The "big four" in the U.S. wireless phone market would become the "big three" if the AT&T/T-Mobile deal is approved by regulators. Anytime you have one less major company to compete with for new customers, it is a good thing. There is little reason to think merely adding T-Mobile will make AT&T more attractive to wireless subscribers. Surely AT&T will talk about network efficiency as it sells the deal to its own investors, but in reality there is no reason to think AT&T will see major network improvements from this deal. In fact, there are 39 billion reasons why the company will have even less money available to upgrade its already-suspect network coverage.

Verizon Could Feel Pressure to Pay a Huge Premium to Acquire Sprint

This, of course, would be predicated on the U.S. Government allowing the AT&T/T-Mobile merger to go through, which is far from certain. Post-deal, AT&T would have about 40% market share versus around 30% for Verizon (NYSE:VZ) and about 10% for Sprint. However, if regulators allow two companies combined to have 70% market share (so long as neither has more than 50%), there would be fewer reasons they would block a Verizon/Sprint deal in the future. After all, in that scenario AT&T and Verizon would each still have less than 50% market share, even though they would combine for 80%, rather than 70% in total.

Sprint Screws Up Mega Deals And Is Better Off Without T-Mobile

Sprint has been down the transformative deal road before, and it lost big time. Remember Sprint's acquisition of Nextel in 2004? That deal was a disaster as the integration went horribly wrong. The purchase price back then? About $35 billion, very similar to AT&T's offer of $39 billion for T-Mobile. Sprint has since written down most of its investment in Nextel and the deal will easily go down as one of the five worst mega deals of the last decade. Given the company's track record, it is probably a blessing in disguise that Sprint is not getting to buy T-Mobile.

Smaller Acquisitions Could Still Help Sprint, and Come with Less Risk

Assuming the AT&T/T-Mobile deal gets approved, there are no other mega deals Sprint would really be able to do, which eliminates the risk that they screw one up. Instead, they could focus on gobbling up smaller wireless players to further enhance their market position, even though they will be relegated to the number three slot by default. Such smaller deals would still be very accretive to Sprint's earnings and would cost investors a lot less money upfront, not to mention come with less integration risk. Essentially, there will still be ways for Sprint to grow profitably even without T-Mobile, and do so in a much safer way.

Sprint Stock is Getting Cheaper Even Though Business Is Recovering

Sprint's share price will likely decline on the news of the AT&T/T-Mobile deal, but the company's turnaround plan continues to gain traction. CEO Dan Hesse has stemmed subscriber churn, boosted the company's phone lineup, and halted net new subscriber losses. Business should continue to improve as the company embarks on a major network efficiency plan over the next few years and the stock is only getting cheaper as industry pundits pan the company's future after this latest deal. A contrarian investment in Sprint actually had many things going for it before this deal (provided you can take a longer term view of things) and with a stock price likely to decline (despite fewer future operational risks), investors who are interested in playing the turnaround story can get an even better price.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in S over the next 72 hours.