With the Nov. 1 deadline come and gone for T-Mobile to extend its merger agreement with Sprint, analysts at LightShed Partners reiterated their call for Deutsche Telekom (DT) to renegotiate the terms of the $26.5 billion deal—given further erosion at Sprint and rising costs of the transaction.
A lower price paid to Sprint could actually help companies' case with the states that sued to block their deal, the analysts said in a Nov. 4 post, which followed an earlier call for the companies to renegotiate the terms.
The transaction has received approvals from both the Federal Communications Commission (FCC) and the U.S. Department of Justice (DoJ) contingent on certain conditions, including the divestiture of prepaid and spectrum assets to Dish Network. Even though the deal has received approval from the two expert agencies, as T-Mobile CEO John Legere noted during an earnings call last week, it faces opposition from more than a dozen state Attorneys General. That trial is due to start Dec. 9.
LightShed's reasoning for renegotiation: T-Mobile’s fundamentals remain strong; it’s leading the industry in subscriber and revenue growth and generating material free cash flow. And while many believe the merger is all about T-Mobile getting hold of Sprint’s 2.5 GHz spectrum, it’s likely that Sprint’s spectrum would be available for lease or purchase if the deal were to fail. Plus, alternative spectrum options are looking better, according to LightShed, pointing to positive developments around the C-band.
Meanwhile, Sprint’s losing subscribers, its churn is approaching 2%, and its wireless service revenue is in decline. Or, as the analysts stated: “Sprint is a mess and deserves a lower price.”
Cutting the price to Sprint shareholders based on Sprint’s under-performance might actually help its case with the states, they argue. “It would underscore the effective ‘failing firm’ argument the companies have been making more aggressively since the deal approval process has lengthened,” wrote analysts Walter Piecyk and Joe Galone. “We do not believe a re-cut deal would alter the terms of their agreements with the FCC or the DOJ. In fact, it might provide FCC Chairman Ajit Pai with additional talking points in support of the deal. He has already been quite vocal in support.”
Piecyk asked T-Mobile about the deal expiration date on the earnings call last week and this was the answer: “Sprint and we are currently focused on working very diligently to complete the last remaining steps to be able to close the merger in early 2020,” Legere said. “And I think that says everything that we need to say about that date.”
It’s possible that DT wants to wait until after Judge Timothy Kelly signs off on the DoJ deal before re-negotiating the price; the judge has not yet signed off on the Tunney Act review of the deal with the DoJ, but the analysts said they expect that to happen before Thanksgiving.
DT also could be waiting to see what the financial impact is from the Lifeline subsidy debacle. New Street Research analysts addressed that in a note to investors over the weekend, saying the Lifeline enforcement process could result in fines in the low billions of dollars and some restructuring of the deal between T-Mobile and Sprint. That, however, isn’t relevant to the competition issues that will be at the core of the trial with the state AGs, they added.
SoftBank, Sprint’s majority owner which reports earnings on Wednesday, has been dealing with other problems of late, including the failed initial public offering at WeWork and subsequent bailout. LightShed said SoftBank is unlikely to attempt to fix Sprint if the merger with T-Mobile fails.
Other analysts said they’re watching to see if the terms of the deal will change. Analysts at Raymond James said they continue to believe that the best option for Sprint is the proposed merger with T-Mobile to gain scale, drive improved margins and cash flows, and quickly deploy 5G nationwide.
“However, given the deterioration of Sprint's business, as well as the Lifeline services claimed/collected/reimbursed issue, since the merger was announced in late April 2018, we wonder if in the name of fairness the parties involved will need to address the terms of the deals,” wrote analyst Ric Prentiss. “Given September 2019 quarter results and trends, we feel the fair value for Sprint on a standalone basis has dropped to ~$3 per share (<$2 for the operations and <$2 for the owned/leased 2.5 GHz spectrum).”
Moffett Nathanson’s Craig Moffett said it’s tempting to suggest that Sprint’s dire position should help in the state AG case. “And perhaps it will,” he wrote in a note assessing Sprint’s latest quarterly results. “If the states win the case and the deal doesn’t happen, Sprint will very likely either have to sell spectrum—which would be tantamount to burning not only the furniture but the house itself to keep warm—or the company will have to be restructured. Neither of those outcomes would be good news for SoftBank.”