T-Mobile And Sprint Put Rumors To Rest, Announce Deal

Summary

• T-Mobile and Sprint to combine in all-stock deal.
• T-Mobile's John Legere will be CEO.
• Deal must pass regulatory muster to finalize.

T-Mobile (NASDAQ:TMUS) and Sprint (S) have announced that the two cell companies intend to merge in a deal worth $26 billion. The value of the combined company would be in the neighborhood of $146 billion. This would combine the nation's #3 and #4 carriers to create a stronger #3. Verizon (VZ) is the biggest carrier with rival AT&T (T) slightly behind. The newly combined entity would retain the T-Mobile name and would put 127 million customers under one proverbial roof.

The terms of the deal are a bit complex, but as an all-stock deal, it would avoid costly tax implications. T-Mobile will exchange 9.75 Sprint shares for 1 T-mobile unit. Deutsche Telekom will control 42% of the combined unit while SoftBank (which controlled 85% of Sprint stock going into the deal) will control 27% of the new entity. With the stakes of the two big institutional players figured out, that leaves 31% of the stock available to the public.

This deal has been rumored for quite some time, but the players involved never seemed to be able to get it across the finish line. With the marriage finally seeming to be set, all that is left is approval by U.S. regulators. Investors should not expect that to be an easy task. Look for Sprint and T-Mobile to argue that the deal will help the company build out a robust 5G LTE network that is the next step in the world of cellular. The companies will also likely argue that the scale and size of their main competitors makes it difficult for the smaller carriers to compete. Verizon and AT&T both sport market caps above $200 billion. Verizon has 149 million customers, and AT&T boasts 134 million.

If one looks at some of the metrics, you can see why these two getting together makes sense. Both T-Mobile and Sprint have higher churn than Verizon and AT&T, and both have lower average revenue per user (ARPU). Combining two smaller players will allow these entities to work on improving churn as well as enhancing revenue retention.

Chart Source - Fierce Wireless

From an investor's perspective, this deal has some interesting dynamics. In my opinion, this is better for Sprint in the near term and better for T-Mobile in the longer term. That opinion comes with a big caveat. The street is already expressing concern about how regulators will look at this deal. The street sees a lot of hurdles and feels that the deal will take a lot of time to come to fruition at great expense. Until there is a formal submission to regulators and the "experts" begin to weigh the odds in favor of approval, both Sprint and T-Mobile will have a cloud over their heads. The biggest job for management of both companies in the near term is "selling" the benefits of the deal to the street in preparation for "selling" the benefits to federal regulators.

In my opinion, Legere is a great pitchman and will be able to set the stage for how this deal is perceived. The immediate hit of over 10% on Sprint and 5% on T-Mobile will be a near term frustration for investors, but is likely an overreaction to the challenges of getting past regulators. In the end, it is my opinion that regulators will allow the deal to pass in some form as long as there are assurances and guarantees that consumers will not be hurt. This will be a lengthy process, so timing your investments needs to be considered. Stay Tuned!

Analyst’s Disclosure: I/we 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.