MoffettNathanson: A Sprint/T-Mobile tie-up is no done deal

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Even if all the financial pieces were to somehow fall into place for a Sprint/T-Mobile merger, the question of regulatory approval still looms large under a Trump presidency, MoffetNathanson said.

Investors are increasingly enthusiastic about the likelihood of a merger between T-Mobile and Sprint under a Trump administration, but the prospects for a deal may not be any clearer than they ever were.

The Japanese behemoth SoftBank spent more than $20 billion to acquire Sprint in 2012, and the company had hoped to acquire T-Mobile as well, merging the carriers to take on Verizon and AT&T. That effort was dropped when U.S. regulators indicated they were opposed to a merger, however.

Shares of both T-Mobile and Sprint have climbed in recent weeks, though, due to speculation that a tie-up between the carriers will be more likely under a Donald Trump administration than it was under President Obama. And they’ve continued to rise after Trump announced earlier this week that SoftBank will invest $50 billion in the U.S. in an effort to create 50,000 jobs.

The president-elect made the announcement during a surprise appearance in the lobby of New York’s Trump Tower with SoftBank CEO Masayoshi Son. Trump then took to Twitter to claim that Son “would never do this” if Trump had not been elected president.

The unexpected news prompted PC Mag’s Sascha Segan to predict that a merger of the two operators “is a done deal.” The amount Son committed to invest could equal the price to buy T-Mobile and deploy 5G technologies, Segan suggested, and the promise to create 50,000 jobs “may dovetail with the fact that about 50,000 people work for T-Mobile right now.”

Such a deal may no longer make sense financially, however, MoffettNathanson wrote in a research note to investors this morning.

“As we’ve written repeatedly over the past year, if one strips away the distortions created by handset lease accounting, Sprint trades at an extraordinary premium to T-Mobile,” MoffettNathanson wrote. “Perhaps the market will never go through the effort to figure out just how large these distortions are, but T-Mobile and its parent Deutsche Telekom certainly will.”

RELATED: T-Mobile/Sprint tie-up is far from certain under Trump: Cowen and Co.

Sprint’s stock has risen dramatically over the last two years, but the company is still struggling to gain financial stability, making it an unattractive acquisition target for T-Mobile or its parent Deutsche Telekom. And an acquisition of Sprint by Deutsche Telekom is also unlikely, MoffettNathanson wrote.

“That leaves only scenarios where SoftBank buys T-Mobile (presumably conditionally based on being allowed to merge the companies afterwards),” the analysts said. “But while we won’t go into a full balance sheet analysis of SoftBank here, this hypothetical would have its own problems, not least SoftBank’s already high leverage, which would make a deal challenging, and what we would expect would be an uncertain willingness of DT to accept SFTBY currency. Remember that SoftBank’s stock is itself heavily reflective of the valuation being ascribed to Sprint.”

Even if all the financial pieces were to somehow fall into place, the question of regulatory approval looms large. T-Mobile has emerged as a clear threat to the nation’s two dominant carriers, and Sprint is gradually finding its footing as it adds subscribers. So regulators may not be inclined to buy arguments that they need each other to compete.

“As the probability of bankruptcy has faded with Sprint’s recent refinancings, and as its stock price has risen with deal speculation, it has robbed itself of its best argument for allowing a merger,” MoffettNathanson wrote. “Certainly, on its face, a merger would be hard to sell to the DOJ even in a Republican Administration.”