In a report published Wednesday, Morgan Stanley analyst Simon Flannery commented on the opportunities and challenges surrounding a potential merger between Sprint (NYSE: S) and T-Mobile US (NYSE: TMUS).
"Dramatic Synergy Opportunities"
Flannery commented on the "dramatic" cost synergies of more than $3 billion per year for the wireless "framily." The analyst emphasized that if the deal is successful, Sprint and T-Mobile shareholders could see material upside. The firm noted that this potential merger would be an easier integration than the Sprint and Nextel deal.
Risks Weigh Heavily on Rewards
Despite significant opportunities for the companies and its shareholders, Morgan Stanley reported three major risks of the potential merger.
Simon Flannery wrote, "1) The FCC and DoJ have demonstrated their concerns over further industry consolidation amongst the major players, through prior decisions and actions ahead of upcoming spectrum auctions. 2) Traditional HHI measures suggest significant concentration. 3) While T-Mobile's strong momentum and Sprint's commitment to the Spark network rollout and testing of new pricing plans suggest that competition among all players is robust, the deal review process could distract the companies from their management, network planning, spectrum strategy and other initiatives."
The firm added that Sprint and T-Mobile will already face near-term headwinds of the iPhone 6 rollout in a few months, spectrum auctions this year and next, and the "ongoing competitive developments in the 'Wireless wars."
Morgan Stanley holds an Underweight rating on Sprint and $5.00 price target. Bearish on the stock, the analyst reported that the company's "competitive position is challenged. We expect strong competition from industry peers who have eclipsed Sprint's footprint with 4G / LTE to pressure growth."
The firm added that Sprint's large debt and free-cash-flow burn continue to weigh on the company. Quality and Network Vision execution risks could also take a toll on growth.
Although Equal-weight rated T-Mobile appears more attractive to investors, Flannery noted that the "sustainability of momentum is a wild card." Morgan Stanley remarked on numerous potential risks including competition, "aggressive" pricing by peers, high leverage, auction spending, and a higher capex.
Shares of Sprint closed at $8.32 on Tuesday. The stock spiked to $8.40, up 0.96 percent following Wednesday's opening bell.
T-Mobile closed at $32.55. Shares have begun a gradual climb Wednesday morning and are currently up 1.38 percent at $33.00.
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