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Sprint Stock Will Plummet If the T-Mobile Merger Gets Squashed

Ian Bezek

Sprint (NYSE:S) stock has taken a fall. After spending most of the past few quarters trading between $6 and $6.50, Sprint stock has tumbled over the past week. Shares now trade around $5.60 each. That’s their lowest level since this past August.

Sprint Stock Is a Risky Bet on Wild Card M&A Chances

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It’s not hard to see why. The tortuously slow merger process between Sprint and T-Mobile (NASDAQ:TMUS) has hit more snags. On Thursday, reports surfaced that New York, California and many other states are considering suing to block the deal, even if the federal government gives it approval.

That comes on top of the FCC pausing its merger review earlier this month to pursue more information. Additionally, some congressional representatives have harshly criticized the proposed tie-up recently. As a result, S stock slumped more than 10 percent over the past week as investors priced in the rising odds of the deal breaking.

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Rite-Aid All Over Again?

The government’s anti-trust department has made some odd moves in recent years. For a notable example, think back a couple years ago to the department’s decision to block the Staples and Office Depot (NYSE:ODP) merger because it would supposedly create a monopoly.

The government seemed unaware that office supply stores themselves are increasingly an anachronism in the age of Amazon (NASDAQ:AMZN). In any case, ODP stock languishes around $3.50, down nearly 50% since its merger was blocked. Similarly, the government stopped a merger of two video rental companies after Netflix (NASDAQ:NFLX) already existed, again, to block a supposed monopoly in a dying industry. Both subsequently went bust.

Fast forward, and last year we saw a dreadful outcome for poor Rite-Aid (NYSE:RAD). Walgreensm (NYSE:WBA) had been trying to take over Rite Aid for several years. but it was unable to get regulatory approval. Then Walgreens tried modified proposals to buy a smaller number of stores.

Rite Aid management got distracted from running their business, and store performance lagged. By the time Rite Aid finally got any sort of deal done, its business economics had collapsed. RAD stock now trades at just 65 cents, down more than 90% from Walgreen’s initial takeover offer.

Sprint stock could be heading for a similarly tragic fate. It’s been apparent for years that Sprint and T-Mobile should merger to create a viable third option to AT&T and Verizon. Yet, the government seems increasingly set on blocking the deal. With Sprint set to have a poor 2019 as an independent company, shareholders need to start asking what happens if the deal is scuttled.

What Happens With 5G?

An interesting element of the proposed merger is the 5G question. Sprint, like the other carriers, has invested heavily in 5G. Yet, it doesn’t seem like they have the capability to be a true contender. Witness former CEO Marcelo Claure’s comments last year:

“Our plan anticipates a limited 5G build over time that will lack broad coverage. Given the characteristics of our mix of spectrum and the size of the capital expenditures involved, Sprint will be able to deliver 5G only in limited areas, focusing on population-dense metropolitan areas. Consequently, Sprint as a standalone company cannot fully seize the tremendous opportunity that 5G creates.”

The Trump administration has made national 5G rollout a priority and is seemingly concerned that China will beat the U.S. to the punch. That augurs in favor of the government looking more positively on a proposed Sprint/T-Mobile tie-up.

On the other hand, the clock clearly is ticking for Sprint. If they can’t merge with T-Mobile, will customers still view them as a reasonable option if they can’t deliver faster speeds outside of major cities?

Sprint: Very Rocky Financial Outlook

Over the past decade, Sprint has run annual net losses in the $2.5 billion to $4 billion range. Excluding last year’s tax reform driven gains, Sprint hasn’t been profitable on an annual basis even a single year over the past decade. All told, it has lost more than $25 billion. Long-term debt is now up to $36.3 billion.

Sprint stock represents an investment in a very sick standalone company. This is why it is so imperative that Sprint merge with T-Mobile. There are so many costs each company faces separately now, ranging from infrastructure deployment such as 5G on through to advertising, store locations, and management staff. Sprint desperately needs to slash its overhead to become profitable and face its gargantuan debt obligations.

In fact, though it may be posturing to try to get the deal approved, Sprint has suggested that it may run out of cash if the deal is blocked. And given its huge losses, it’s not unreasonable to think that creditors would pull the plug if there’s no realistic exit strategy.

Sprint Stock Verdict

It could be tempting to buy S stock after the recent more than 10% decline. If the government backs off and lets the merger through, Sprint stock buyers here should make a nice profit.

But before you take the plunge, make sure you think about the potential downside closely. Sprint’s business model hasn’t proven viable over the past 10 years. And with the huge capital necessary to roll out 5G in coming years, it’s unclear if Sprint can make it as a standalone company. Sprint stock will trade much lower if the government breaks up the deal.

At the time of this writing, Ian Bezek owned WBA stock and had no position in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.

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