Sprint may have to fork over more than $90 billion in total consideration if it hopes to strike a deal to acquire T-Mobile, Jennifer Fritzsche of Wells Fargo Securities said in a research note.
The nation’s fourth-largest mobile network and its parent SoftBank have long targeted T-Mobile, but efforts to merge the two U.S. carriers were stymied under President Barack Obama by federal regulators. Donald Trump’s election win has ratcheted up speculation that a tie-up may finally come to pass, though, and it continued to heat up after Trump announced last week that SoftBank will invest $50 billion in the U.S. in an effort to create 50,000 jobs.
“Since the 11/8 presidential election, our wireless stocks have experienced a very meaningful ‘Trump bump,’ with Sprint up 31 percent and T-Mobile up 11 percent (vs. a 5.5 percent move in the S&P),” Fritzsche wrote. “The reason is simple, in our view, as many believe a Republican-dominated FCC and DoJ could open up merger opportunities that had been previously shot down…. The elephant in the room is how might a Sprint/T-Mobile marriage be viewed by the new administration?”
Indeed, it isn’t certain that a Trump administration would take a significantly lighter touch when it comes to consolidation in telecom than the Obama administration did. Trump has vowed to block AT&T’s proposed acquisition of Time Warner, and there’s precious little other evidence one way or the other.
Such a deal may no longer make sense financially, however, MoffettNathanson wrote in a research note last week. T-Mobile’s price tag is likely in the range of $93.4 billion, Wells Fargo’s Fritzsche wrote, or 8.5 times its estimated EBITDA for fiscal year 2017.
“This values T-Mobile equity at $72 a share, or a 28 percent premium to its latest closing price,” she wrote. “Sprint could assume T-Mobile’s $33 billion in net debt and would then need to raise $60 billion in debt and equity to fund the remaining purchase price.”
A deal makes sense on several levels, though, Fritzsche continued. The combined companies could reduce costs by cutting jobs, consolidating billing systems and lowering advertising and marketing budgets. They could also streamline their combined networks, and leverage complementary spectrum portfolios.
A merger would clearly overhaul the U.S. wireless landscape dramatically, resulting in a market dominated by three carriers. And that may be an even bigger stumbling block than T-Mobile’s price tag, Fritzsche warned.
“Interestingly, Sprint/T-Mobile would have more total subscribers than Verizon and nearly as many as AT&T,” she wrote. “In fact, this may be one of the largest impediments to a deal being approved—the industry would become even more concentrated, with T-Mobile/Sprint having a dominant competitive position among ‘value’ postpaid and prepaid subscribers.”