Shentel is one of the nation’s largest regional wireless operators with just over a million customers, thanks to its purchase of nTelos and its continued position as a Sprint affiliate. But more importantly, the company sits directly at the center of the proposed merger between Sprint and T-Mobile.
And, according to one Wall Street analyst firm, the carrier is sitting pretty.
Specifically, the analysts at Macquarie Research wrote that the proposed Sprint and T-Mobile merger “could lead to one of several positive outcomes: 1) New T-Mobile could buy Shentel’s wireless business; 2) Shentel could buy T-Mobile’s subs in its footprint at 75% of their value with financing help from New T-Mobile (if needed); or 3) T-Mobile would have to turn off the competing network; with this, Shentel would get rid of a competitor and gain access to T-Mobile’s spectrum. For the right deal, including the purchase of T-Mobile’s subs, we expect management could take leverage up to 4.5x.”
Investors, however, don’t seem all that enthused with Shentel’s position. The company’s stock dropped precipitously the day the merger was announced, and Shentel shares have remained relatively flat at $33 since.
Nonetheless, Shentel’s own executives addressed the company’s position during Shentel’s quarterly conference call with investors in May shortly after Sprint and T-Mobile announced their merger deal, arguing that Shentel investors could see gains.
First, Shentel’s Earle MacKenzie said, Shentel cannot file an injunction to try to block the merger. If the merger is approved, the combined Sprint and T-Mobile—generally called New T-Mobile—will have 60 days to decide whether it wants to purchase Shentel’s wireless business.
“If they do decide to buy our wireless business, there is a formula that you provide to our shareholders, a very handsome return. If they choose not to buy our wireless business, Shentel will remain an affiliate of the New T-Mobile and for the next 180 days, we have the option to acquire the T- mobile customers and that work in our 7 million POPs service area at 75% of the value of the customers and asset as determined by the merger value,” MacKenzie said during the call, according to a Seeking Alpha transcription of the event. “If we can’t finance the purchase, then the New T-Mobile will finance the purchase at their cost of capital for up to five years. If Shentel decides not to buy T-Mobile network and customers, then the new T-Mobile must turn off the T-Mobile network that overlaps Shentel within two years.”
MacKenzie added the company won’t spend much energy speculating on how the transaction might play out and is instead focused on moving its business forward.
And, according to the Macquarie analysts, Shentel is doing well in that regard. In a recent report to investors, the analysts wrote that Shentel’s wireless business “has a lot of organic growth left.” The analysts said that, thanks to Shentel’s expansion efforts, the company may ultimately increase its subscriber base by 20% over the next two or three years, “boosting its already above-peer growth. Its ability to turn around nTelos has been impressive and gives us confidence in the strategy.”