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T-Mobile & Sprint Strive to Achieve Pending Merger Approval

Zacks Equity Research

It seems like T-Mobile US, Inc. TMUS and Sprint Corp. S are leaving no stone unturned to win regulatory clearance for their $26.5 billion merger. The third- and fourth-largest U.S. wireless carrier (by subscriber count) are reportedly going to announce commitments to the federal government, including asset sales and rural-service guarantees. The move is expected to help them in obtaining approval for their pending merger.

In late April, the two companies extended the deadline for closing the deal by around three months to Jul 29, 2019. Per media reports, they are now planning to promise the sale of one of their prepaid brands, a three-year buildout of 5G network and a reiterated pledge to not increase prices while the network is being built. Markedly, the new promises would follow talks with the Federal Communications Commission (“FCC”).

Such decisions are likely to help soothe the clearance process of the deal, which is being reviewed over concerns of reduced competition in the U.S. wireless industry as the number of leading players would then decline from four to three. The FCC and the U.S. Department of Justice are yet to have their final say on the transaction.

The companies have agreed to separate Sprint’s Boost brand while retaining their Virgin Mobile and T-Mobile’s Metro businesses. Notably, these three make up the largest segment of the U.S. pay-as-you-go market with around 42% share.

Story This Far

In April 2018, T-Mobile and Sprint had entered into an agreement to merge in all-stock transaction at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each T-Mobile share. The successful transaction is anticipated to create thousands of jobs, while providing the United States an upper hand over China in creating the next generation of mobile networks.

The combined firm — New T-Mobile — would have about 127 million customers, a strong closing balance sheet and a fully funded business plan. It represents a total implied enterprise value of nearly $146 billion. Subsequently, T-Mobile received approval from the Committee on Foreign Investment in the United States (“CFIUS”) for the deal. Also, Team Telecom gave its green signal.

Notably, T-Mobile got shareholder approval for this game-changing merger. This was considered as a step forward in creating the New T-Mobile through which the company will bring robust competition to the 5G era. The New T-Mobile will have the network capacity to rapidly create a nationwide 5G network with the breadth and depth needed by U.S. firms and entrepreneurs to continue leading in the 5G era.

However, T-Mobile and Sprint were required to convince the Trump administration’s antitrust regulators that there is plenty of room left for healthy competition in the wireless industry, comprising the top two players, Verizon Communications Inc. VZ and AT&T Inc. T.

To Sum Up

The FCC and the U.S. Department of Justice are still investigating the impacts of the merger on U.S. consumers as they think that it would reduce the number of players in the industry. The FCC is yet to take a call on whether to grant the deal regulatory approval and if it serves the public interest.

Meanwhile, the two companies have been arguing that the deal would create a stronger rival to industry frontrunners like Verizon and AT&T, and would actually help and not hurt competition. T-Mobile and Sprint have committed to not increase prices on their plans for three years. The companies have also stated that this deal would allow New T-Mobile to provide wider and faster 5G coverage as well as improve competition in the in-home broadband space.

While T-Mobile, a Zacks #2 Ranked (Buy) stock, has a long-term EPS growth expectation of 15.1%, the same for Sprint, a Zacks #3 Ranked (Hold) stock, is 19.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Driven by proper execution of operational priorities, shares of T-Mobile and Sprint have recorded an average return of 31.8% and 19.8% respectively, compared with the industry’s rise of 9.2% over the past year.

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