With news that a tie-up with T-Mobile is back in the offing, analysts are weighing strategic options for Sprint—with a minority investment model perhaps being the most practical.
In a research note, Deutsche Bank Securities analysts said that while SoftBank CEO Masayoshi Son explained that "consolidation is the biggest opportunity" on SoftBank's most recent earnings call, the companies do have several scenarios to consider. The one that has the fewest downsides is a cable company taking a minority equity stake, they said.
“Sprint is flush with spectrum [Sprint has characterized cable’s fiber plant as being synergistic with its higher frequency spectrum], but has lacked the balance sheet flexibility to fully utilize/build out its 2.5GHz airwaves in recent years (elevated leverage),” the analysts wrote. “Cable companies [Comcast and Charter] have sounded very cautious on all-out ownership of a wireless carrier, but a minority equity stake in Sprint would enable them to dip their toes in the wireless waters with receptive partners. Sprint could use the equity infusion to invest in/improve its network, and cable could leverage this as another MVNO partner.”
They added that given Sprint’s $35 billion market cap, this would be a lower cost and lower risk outing for a cable MSO, with the transaction facing limited regulatory hurdles.
“This also preserves the ability for Sprint to (potentially) seek a partnership/merger with T-Mobile later on, though we continue to believe an S/TMUS merger faces very high regulatory risk,” they added.
As for the other options, a cable company buying Sprint is unlikely given the hypercompetitive state of the wireless market (especially in contrast to cable’s broadband commercial opportunity), according to DB. Similarly, DB sees larger tech players investing in or merging with Sprint as the least likely option: “Wireless (and telecom, broadly) remains a very capital intensive business, and we do not believe larger tech players are currently interested in committing significant amounts of capital towards a business where industry returns are at greater risk of eroding.”
And as for the Sprint/T-Mobile merger option, there’s more against it than simply clearing regulatory obstacles.
“We believe the competitive activity and price compression U.S. wireless has seen from a four-player market has significantly benefited U.S. consumers, and a merger could be viewed as potentially reversing this success,” the analysts said. “Both Sprint/T-Mobile are also on significantly better financial footing (relative to 2013, when this was initially discussed), and are backed by financially healthy parent companies (Softbank/Deutsche Telekom).” Relative valuation and capital structure at the pro forma company are other barriers that need to be overcome, they added.
Still, Sprint’s stock has continued to go up on merger talk, indicating that many investors like the idea.