T-Mobile shares 'could be worth more than $90 in a deal scenario': Jefferies

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A merger could produce synergies "ramping to a $4.5 billion run rate" by the third year, Jefferies said.

T-Mobile still appears to be a good investment on its own, but shares could be worth more than $90 each if a potential merger with Sprint eventually goes through, according to Jefferies Equity Research Americas.

Merger talks between the nation’s No. 3 and 4 wireless network operators have gone on for weeks, and one report last week had the carriers reaching “a major breakthrough” in negotiations. That breakthrough may have been Sprint’s willingness to accept a stock-for-stock merger that values Sprint at or near its current price, according to a separate report that emerged last week.

While SoftBank’s acquiescence may clear one hurdle, though, a tie-up is far from a done deal.

“Both parties have long expressed an interest in a merger, though we believe valuation and the regulatory outlook proved to be stumbling blocks,” Mike McCormack of Jefferies wrote in a research note this morning. “With press reports suggesting an all-stock deal at at-market pricing, we believe the valuation gap has narrowed significantly. Such reports also suggest SoftBank’s chairman is now willing to accept current market value, which could put even greater leverage in T-Mobile’s hands. While it appears an agreement on price could be near, we believe several considerations remain, including management structure and deal break, among others.”

T-Mobile CEO John Legere is expected to lead the combined carrier should a deal occur, but many questions remain about what a new front office could look like.

A merger could produce synergies “ramping to a $4.5 billion run rate” by its third year, McCormack continued, which could prove conservative compared to some investors’ expectations. And while a deal of this kind would typically provide significant capex savings opportunities, a combined carrier would likely have to accelerate network spending “given underinvestment at Sprint.”

“Given these assumptions, we anticipate meaningful accretion, with free cash flow per share nearly 44% higher in year three,” McCormack wrote. “Using multiple analysis, we believe T-Mobile could be worth more than $90 in a deal scenario.”

Shares of T-Mobile were selling at $63.20 as the market opened this morning.

Industry insiders consistently maintain that the most significant hurdle to a merger will be in gaining regulatory approval. But that may prove easier now that a handful of major players are inching their way into the wireless market, potentially loosening the grip of the big four—or what may soon be the big three.

“As with many horizontal mergers, defining the market will be critical to how the deal is reviewed and decided upon,” McCormack wrote. “New entrants into wireless, such as Comcast and Charter, could influence the process, as could the outlook for 5G networks and spectrum. We expect the regulatory issue to be the biggest challenge to the deal, and garnering approval would, in all likelihood, require concessions and potential divestitures.”