Telecom & Wireless

How Much Sprint Might Actually Fetch in a Rumored Merger With T-Mobile US

Jon C. Ogg

Published: June 20, 2017 1:50 pm

Last Updated: January 12, 2020 10:53 am

If there is one merger target that has been rumored for years, one company that has already seen a failed merger in recent years, it’s Sprint Corp. (NYSE: S). There are yet again market rumors that T-Mobile US Inc. (NASDAQ: TMUS) is about to make a merger offer to combine the number three and number four wireless carriers in the United States.

24/7 Wall St. often frowns on commenting about the endless rumor mill that drives stocks on Wall Street. After all, most rumors end up being bogus and never materialize. That being said, it is important for investors, speculators and would-be suckers to consider what a buyout price should ever really be expected in a merger offer.

In the case of T-Mobile, do not forget that AT&T Inc. (NYSE: T) tried to acquire it in 2011 for a purchase price of about $39 billion. That deal was blocked by regulators, as anti-competitive fears were harsh at the time. AT&T paid T-Mobile a $3 billion breakup fee and took another $1 billion charge against spectrum rights as the deal imploded.

T-Mobile is now worth $53 billion. Sprint, which is almost considered a Softbank tracking stock by some investors, has a market value of $32 billion.

Again, we won’t speculate on the likelihood of this merger’s validity nor whether U.S. regulators will ever admit that having three profitable wireless carriers and one money-losing carrier merging into three profitable carriers is anti-competitive. The government remains unpredictable.

What is known is that Sprint is loved by some analysts on Wall Street. It is also hated by others. Investors are incredibly mixed too. Here is how some of the analysts rate Sprint.

Merrill Lynch’s David Barden has an Underperform rating, the firm’s version of a Sell rating. Its price objective is a rather unimpressive $2.60. The firm’s investment rationale from June 14 called the Sprint unlimited plan a mole hill rather than a mountain. Barden said:

We believe Sprint shares are overvalued based on what is known about the combined Sprint/Clearwire/Softbank’s strategy and our forward looking estimates. Prior to being acquired, legacy Sprint traded at 5.7x forward EBITDA and now trades at a higher multiple. The net change in the competitive climate has been negative in the intervening time, and our growth expectations have not changed materially, leading to our Underperform rating.

S&P Global’s CFRA has a Buy rating and a $10 target for the 12-months ahead. The analyst said in June:

We are encouraged by recent momentum in postpaid phone additions and think leasing programs have helped stabilize/grow S’s subscriber base. Despite recent unlimited plan offerings by larger peers, we expect S to be very aggressive with promotions/marketing efforts ahead of the next generation iPhone launch in September and see potential for share gain. We see parent SoftBank being more active in M&A discussions given a more favorable regulatory environment. We think S will likely make further progress with improving its network, and it could look to sell excess spectrum.

UBS rated Sprint as Neutral with a $9 target on June 15. The firm’s John Hodulik recently met with Sprint’s management. He said:

We recently met with Sprint management. The focus was on further cost cutting opportunities, the new promotional offer, network performance, while providing an update on strategic options for the company. Similar to prior comments, management believes a merger with T-Mobile is the biggest opportunity for value creation but weighs this against a more uncertain regulatory path. CEO Marcelo Claure believes a link up with cable is also an option while Sprint has recently had conversation with internet companies regarding bandwidth purchases. A large bid-ask spread appears to be the main issue from our standpoint and mgmt expressed doubts about carving out 2.5GHz spectrum to close the gap…. We believe Sprint is likely to participate in M&A, providing valuation support. Our price target is based on 7x our 2018 cash EBITDA estimate, at the low end of prior deals.

On June 13, Wells Fargo commented about whether the unlimited plan implied a merger is coming. The firm’s Jennifer Fritzsche had an Outperform rating, and here investing thesis said:

We believe Sprint is one of the most interesting stock on our wireless list right now. Potential catalysts include: continued M&A potential, margin expansion and deployment of 2.5GHz spectrum.

Barclays remained pat with an Equal Weight for Sprint and a Neutral sector rating. Its target was $8 in that call.

HSBC issued a report delving into the synergies of a Sprint and T-Mobile hookup on June 7. The firm said that it preferred T-Mobile with a Hold rating and $66 target price over the Reduce rating and the $7.20 target for Sprint. That report said:

At current share prices and without any premium or discount DT would own 39.6% and Softbank 32.5% of NewCo. Pooling the two stakes into a HoldCo would be a way for DT to gain control; this structure provides DT 55% stake in the HoldCo…. We believe that the FCC may review the deal with an open mind; however securing an easy approval from the DOJ remains a key hurdle.

Gabelli, a firm that often specializes in looking for value and upside in deals, only has a Hold rating for Sprint. Its latest report was on May 30, and its so-called private market values were shown as follows:

• $5.85 for 2017
• $8.00 for 2018
• $10.70 for 2019

On M&A, Gabelli’s note said:

On Sprint’s and SoftBank’s earnings calls as well as at investor conferences and press interviews over the past few weeks, both Masayoshi Son and Sprint’s CEO, Marcelo Claure, had been emphasizing the following message – while Sprint believes that it is “self-sufficient” and is focused on creating a strong standalone company, both SoftBank and Sprint are open to various M&A scenarios (open to “all kind of possibilities”). While combination of #3 and #4 carriers (TMUS/S) would be synergy-rich, it is not yet clear whether it would be allowed by regulators, although Sprint and SoftBank are hopeful. In addition, there are other possibilities (e.g. cable, satellite providers)… We believe that under the likely “lighter-touch” regulatory regime of the new Presidential administration, the probability of Sprint and T-Mobile attempting a highly synergistic combination has certainly increased. However, we do not view this scenario as a “slam dunk” from regulatory approval and/or industry structure/strategic optionality perspectives.

Morningstar had a three-star rating and called the stock overvalued just on June 6. Its fair value estimate of $5.00 for Sprint shares said:

Through improving liquidity, postpaid customer growth, and falling operating expenses, Sprint has made progress on its most urgent issues. However, it still faces a difficult road ahead, in our view, in returning to service revenue growth, turning around the prepaid business, lowering the cost of customer acquisition, and boosting customer retention rates.

At about 1:30 on Tuesday, Sprint shares were up 3.2% at $8.18 and the average volume of almost 15 million shares had already been traded. The daily range was $7.75 to $8.26, and the 52-week trading range is $3.87 to $9.65. Thomson Reuters has a consensus analyst price target of $7.46.

This is one of those ongoing market rumors that just never seems to go away. Maybe one day it will be true. Maybe not. As always, caveat emptor!