Is Sprint Looking for a Suitable Cable MSO for Merger?

Zacks Equity Research
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The consolidation between telecom service providers (wireless and wireline) and cable MSOs (multi service operators) is becoming more prominent by the day.

Recently, Marcelo Claure, the CEO of leading telecom operator Sprint Corp. S, also commented that the company is looking to benefit from a merger with a cable MSO. However, he also added that Sprint is not part of any merger discussions at the current moment.

Merger between telecom operators and cable TV operators have become the need of the hour. Telecom behemoth AT&T Inc. T recently acquired DIRECTV to offer quad-play fixed voice, video, Internet (both fixed and mobile) and wireless services.

Another telecom giant Verizon Communications Inc. VZ, which is currently offering trial runs of its Internet TV service, announced that it is negotiating with satellite TV operator DISH Network Corp. to lease the latter’s strong portfolio of radio frequencies.

Sprint is now caught up in the ongoing cut-throat pricing competition in the U.S. telecom industry which is inevitably taking a toll on its financial health. Just a couple of weeks ago, credit rating agency Moody’s Investor Service downgraded the company’s credit rating to B3 from B1, or six levels below investment-grade citing excessive pressure due to intensifying competition.

The relatively smaller national wireless operators, Sprint and T-Mobile US Inc. TMUS, jointly holds approximately 32% of the total US wireless market at present. Wireless giants, Verizon and AT&T, on the other hand, together command the larger chunk (68%) of the market share.

Thus, offering cheaper data plan to customers may put pressure on Sprint as its larger peers are far better positioned in terms of scalability, network quality and financial stability.

Recently, Sprint has decided not to take part in the upcoming 600 MHz low-band spectrum auction to be conducted by the FCC. Sprint holds that it has adequate spectrums to support its current and future customers with sufficient network coverage.

However, most of the spectrums that Sprint has are high-band in nature. For that the company needs to install more expensive network equipment and radio antennas to provide quality services. Low-band spectrum is crucial for wireless operators as the signals can be transmitted over longer distances as well as through brick-and-mortar walls in cities.

We believe that one of the reasons behind Sprint’s decision is its weak financial condition. The company has been witnessing annual losses since 2007. It burned a massive $2.2 billion in cash in the last reported quarter which ended on Jun 30, 2015.

Recently, Sprint’s majority owner Softbank Group of Japan set up two off-balance sheet financing vehicles to finance phone and network equipment. As a result, Sprint does not expect to raise additional capital through public debt or equity markets anytime soon.

At this juncture, a merger with a cable MSO will enable Sprint to provide quad-play services, which may include video streaming services as well. The company may also attain the required economies of scale to remain competitive. However, the selection of a suitable cable MSO for the merger is a big concern.

The cable TV market is going through a wave of consolidation. The Charter Communications – Time Warner Cable -- Bright House merger deal is currently under FCC review. French cable MSO Altice NV has acquired Suddenlink Communications and has inked a deal to acquire Cablevision Systems Corp.

Meanwhile, Comcast has already denied all rumors of its pursuing any acquisition after its attempt to acquire Time Warner Cable was thwarted by the FCC. Perhaps Cox Communications is the only notable cable TV operator doing standalone business at the moment. Whether Sprint’s cable TV aspirations will see the light of day is something that only time can tell.

Sprint currently carries a Zacks Rank #2 (Buy).

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AT&T INC (T): Free Stock Analysis Report
 
SPRINT CORP (S): Free Stock Analysis Report
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
T-MOBILE US INC (TMUS): Free Stock Analysis Report
 
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