Why Sprint Is Worried About AT&T Deal

Includes: S, T
by: Trefis

AT&T (NYSE:T) recently announced a $39 billion acquisition of T-Mobile, a topic that has sparked considerable debate. We presented our quick take on the deal in this article . But what does this mean for Sprint (NYSE:S)? Sprint’s shares were down 14% on this news, suggesting concern among investors. Sprint’s primary competitors in the mobile business are AT&T and Verizon (NYSE:VZ).

Our price estimate for Sprint’s stock stands at $5.15 implying a 10-15% premium to market price.

Chart created by using Trefis' app

Why Sprint is Worried

The deal could put the rest of the telecom industry at the mercy of AT&T and Verizon. According to WSJ, Sprint’s CEO voiced this concern, stating, “I do have concerns that it would stifle innovation, and too much power would be in the hands of two.”

Although Sprint has struggled over the past few years, its subscriber trends have begun to improve as a result of better customer service, network upgrade initiatives and the company’s low-cost advantage.

T-Mobile’s customers generate lower average revenue per user (ARPU) than that of AT&T, and the acquisition effectively removes this lower-price competitor from the market. With fewer big-name competitors to choose from, might customers revert to the comfort zone of the big two (AT&T and Verizon)?

Beyond that, might smartphone makers feel added pressure from the big two wireless carriers to offer devices exclusively to them, putting Sprint at a disadvantage? Put simply Sprint’ market share could be in trouble.

What Can Sprint Do?

There have been talks that Sprint could pitch itself as a potential acquisition target for cable companies or could even look to acquire smaller pre-paid competitors like MetroPCS or Leap. The issue here is that big cable companies like Comcast (NASDAQ:CMCSA) do not seem to be interested.

Verizon has similar thoughts as well with regards to acquiring Sprint. Additionally, it may not be a great strategy for Sprint to acquire small players with low ARPU if it really wants to challenge giants AT&T and Verizon.

We believe that one option for Sprint could be to invest in improvement of its service, including a greater push into 4G. Both AT&T and Verizon are moving into LTE and it could put Sprint at a further disadvantage if the company simply relies on WiMax. Sprint would also do well to distinguish its product through new, powerful marketing campaigns.