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Sprint-T-Mobile Merger: Creating Long-Term Shareholder Value

In April 2018, John Legere, the CEO of T-Mobile (NASDAQ:TMUS), made the long-expected announcement that T-Mobile and Sprint (NYSE:S) had reached an agreement to merge in a $26 billion all-stock deal. Before the deal could be completed, however, 14 state attorneys general sued to block the merger from happening, arguing that reducing the number of U.S. nationwide telecommunications companies from three to four would result in less competitive pricing, driving up phone prices for everyone in the country.

On Feb. 11, U.S. District Judge Victor Marrero delivered his final ruling on the case, clearing the last hurdle out of the way for the merger to proceed. The court stated the following:

"T-Mobile has redefined itself over the past decade as a maverick that has spurred the two largest players in its industry to make numerous pro-consumer changes. The proposed merger would allow the merged company to continue T-Mobile's undeniably successful business strategy for the foreseeable future."

The longer the final ruling on the case dragged on, the more Sprint's stock price declined, as the market expected the deal to be blocked. Approximately 24 hours after the news that the merger would be allowed after all, T-Mobile's stock price was up 1.65% to $96.05, while the price of Sprint shares skyrocketed 82.70% to trade around $8.77.


Who's getting the better deal?

Now the last steps for the merger need to be hammered out. The all-stock deal was originally valued around $26 billion for Sprint's 4.11 billion shares outstanding, and the current terms offer 0.10256 T-Mobile shares for each Sprint share.

It's undeniable that owners of Sprint shares before Feb. 10 won the day, since their shares nearly doubled in a short amount of time. However, Sprint now has a market cap of $35.89 billion. At this point, would it be better to buy T-Mobile or Sprint to benefit the most from the merger?

Let's do the math. At 0.10256 T-Mobile shares for each Sprint share, the total amount of Sprint's shares outstanding will translate to 421.66 million T-Mobile shares. T-Mobile has 856.93 million shares outstanding, so the deal will give Sprint control of approximately a third of the combined company. At a price of $96.05 per share, each Sprint share is worth $9.85.

Thus, as long as T-Mobile share prices do not decline, a price below $9.85 for each Sprint share would have the best potential for investors to take advantage of the deal.

What will happen to phone plan prices?

Competition tends to result in lower prices for goods and services, which is why regulators often block corporate actions that combine top companies in the same space. In 1914, the Clayton Trust Act outlawed mergers and acquisitions that "substantially lessen competition" in an industry, so if the court rules that a merger or acquisition would violate the act, then it is not allowed to proceed.

The ruling on this case holds that the merger will not reduce competition. In fact, the court seemed to agree with Legere that the merger will increase competition against rivals Verizon (NYSE:VZ) and AT&T (NYSE:T), while at the same time allowing Dish Network (NASDAQ:DISH) to take the place of the "fourth U.S. telecommunications giant."

As T-Mobile proposed, Sprint will sell its Boost Mobile and Virgin Mobile assets to Dish and allow customers of the new Dish mobile plans to piggy-back on T-Mobile's network for seven years while it built out its own wireless 5G network.

However, some analysts are skeptical on whether Dish will actually do this, or if it will take the (potentially) safer route of monetizing the assets it receives from Sprint and eating the regulatory penalty.

Dish founder Charlie Ergen replied, "If we didn't" build out the 5G network, we'd be writing off $12 billion in assets and subject to $2 billion in fines. It would be financial suicide."

Some analysts hold that Dish will never be able to compete, and that the reduced competition is inevitable. According to former Federal Communications Commission commissioner Gigi Sohn:

"Over and over again, consumers are promised enormous benefits and so-called 'efficiencies' by merging parties, but what they are left with each time are corporate behemoths who can raise prices at will, use their gatekeeper power to destroy competition and new voices, and hijack regulatory and legislative processes. We are already seeing this with the AT&T-Time Warner merger, where promises not to discriminate against rivals or raise prices were broken within months of being approved by a trial judge."

However, T-Mobile has promised to leave phone bills alone for the time being, at least for the next three years. There are several good reasons for the company to stick to this promise. In order to gain the most (both for the company and the shareholders), the combined company cannot afford to raise prices for consumers, at least not in the short term.

Creating long-term value for shareholders

Large-scale mergers like this one can create powerful tailwinds for companies and their shareholders, driven by investor optimism for potential synergies and greater production capacity.

T-Mobile will gain a valuable scale advantage from the merger, but it is also taking on most of a set of assets that has seen negative net income during most quarters in recent years (see below). Thus, while it may be tempting to raise prices, doing so would counteract the very same advantage that the company is hoping to achieve here. In other words, it would defeat the whole point; if T-Mobile were to start raising prices, it might end up acquiring Sprint only to lose just as many customers to its competitors.


In the long term, T-Mobile's growth prospects lie in not trying to push up prices. As of June 2019, Verizon has 151.5 million customers, AT&T has 153 million and the combined total of Sprint and T-Mobile's customers is 138.5 million. The combined company will have the largest 5G network in the U.S., so if it wants to ride the momentum from the merger and gain as many customers as possible, it would not be beneficial to try and establish itself as a higher-priced company.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.