Why T-Mobile US Inc’s Busted Sprint Deal Is a Great Thing
With the dust finally settling on the news that yet another attempt to combine T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) has failed, it’s time (once again) for some straight talk about that proposed merger. The truth? While such a pairing would have proven a welcome “out” for Sprint shareholders, for owners of T-Mobile stock, it would have been a bad deal all around.
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See, as much as the idea of teaming up to take on wireless industry giants AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) makes sense, this is a case where one of the players is likely to be better off not being bogged down by the other. Specifically, T-Mobile is better served by remaining on its own.
Sprint Would be a BIG Project
To its credit, Sprint’s got some things T-Mobile could use — assets like a spectrum portfolio rich in the 2.5 GHz band, which is well-suited for many LTE applications.
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On the flipside, Sprint’s got some things T-Mobile wouldn’t want. Namely, Sprint continues to hold $31.7 billion in long-term debt that’s costing it money each and every quarter. Last quarter it paid out $595 million worth of interest payments to its lenders, which is a hefty 7.5% of last quarter’s top line of $7.9 billion. In a low-margin industry like wireless telecom, that debt load has proven to be a big burden.
Perhaps the biggest sigh of relief current owners of T-Mobile stock may be breathing once they have the benefit of hindsight, however, is that for all the effort Sprint has made to turn things around, the turnaround effort isn’t taking hold. Last quarter’s revenue was off by 3.6% on a year-over-year basis, extending a long, bigger-picture trend.
That’s in stark contrast to the results T-Mobile has posted of late.
Last quarter, T-Mobile’s top line was also down (by about 2%), yet free cash flow nearly doubled YOY. The carrier also added a total of 1.3 million subscribers. That pales in comparison to the number of subscribers added by Verizon and AT&T for the third quarter of the year, but in light of the sheer size and deep pockets of those two big players, it’s commendable progress.
Sprint, by the way, only added about 400,000 new customers in Q3.
Even if Sprint were close to being salvageable, though (which it isn’t), the whispers are that Sprint’s key financial backer, Softbank’s Masayoshi Son, was aiming for control of the partnership and was holding out for a premium price — a curious power play considering Sprint needs T-Mobile much more than T-Mobile needs Sprint.
Son has been unable to turn Sprint’s fortunes around since taking a controlling interest back in 2012. If he hasn’t helped yet, it’s difficult to imagine him pulling out any new tricks under a T-Mobile umbrella.
Looking Ahead for T-Mobile Stock
The irony? While the headlines implied it shouldn’t have been the case, T-Mobile stock has gained nearly 11% since plunging 5% on Nov. 6 when the deal officially unraveled. Consciously aware of it or not, investors collectively agreed they’d rather see no deal made than a bad one made. Moffett Nathanson analyst Craig Moffett explained it best following the end of the merger talks:
“Robbed of the prospect of a merger — at least for now — Sprint will now have to focus on sustainability. That means less, not more, promotionality. With less promotionality will come not only less pricing pressure, but probably also fewer net adds for Sprint … and hence more for everyone else.”
In other words, this is a case where T-Mobile could pay a premium to buy into an operation, or pay nothing and let Sprint implode and then go pick up the shattered pieces — and displaced customers — for free.
Moffett also raised his price target on T-Mobile stock from $69 to $73, recognizing this deal wasn’t going to be a net-fruitful one when all was said and done.
Fortunately for those holding T-Mobile stock, the deal didn’t get done.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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