'Only Sprint/T-Mobile has truly made sense' among recent M&A rumors: MoffettNathanson

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The potential value of a merger between T-Mobile and Sprint is likely already baked in to both company's shares, MoffettNathanson said.

A tie-up between T-Mobile and Sprint remains the most logical potential marriage in wireless, according to MoffettNathanson. But that doesn’t mean investors should be betting heavily on either company.

The election of President Donald Trump coupled with the conclusion of the FCC’s incentive auction a few months ago has given rise to a flurry of speculation regarding potential M&A activity in the mobile market. Among other scenarios, cable players such as Comcast and Charter are widely rumored to be eyeing a partnership with Sprint, T-Mobile or both carriers, and Dish Networks last month was reportedly in talks with Amazon as it prepares to launch an IoT-centric network.

But the nation’s two smallest wireless carriers remain the best potential fit, according to Craig Moffett of MoffettNathanson.

“We’ve never been persuaded by the many deal scenarios that have swirled in the telecom sector,” Moffett wrote in a lengthy research note distributed to investors this morning. “The strategic logic was never sufficient, the balance sheets never strong enough. Only Sprint/T-Mobile has truly made sense, and even that transaction faces much steeper hurdles than the market seems willing to concede.”

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.

The odds of a merger have surely improved under the Trump administration, and a tie-up is likely attractive to both carriers as they continue to compete with their larger rivals. But the value generated by a merger appears to already be baked into the shares of both T-Mobile and Sprint, Moffett argued.

“Still, although many hurdles to the transaction exist – not only from a regulatory perspective, but also from a valuation and a balance sheet perspective – it is undeniable that significant synergies could be derived, even if only after a costly integration process,” Moffett wrote. “With net opex synergies alone worth over $30 billion, we continue to think a deal will be at least attempted.

“Unfortunately, most of that is already in the stocks. Our analysis of synergies suggests that the higher target prices for Sprint and T-Mobile are warranted, even with an assumption of deal likelihood of 40% (assuming an 80% probability of attempt and 50% probability of approval)… but it’s not enough to warrant a change to our ratings for either company given where the two stocks are trading today.”