T-Mobile and Sprint merger
On April 29, T-Mobile (TMUS) announced its merger with peer telecom (telecommunications) company Sprint (S), where 0.103 shares of T-Mobile will be given for each Sprint share (or 9.75 shares of Sprint for each share of T-Mobile).
The companies are hoping to conclude the transaction by the first half of 2019 subject to regulatory approvals. Following the merger, T-Mobile’s parent company, Deutsche Telekom, and Sprint’s parent, SoftBank, are expected to hold ~41.7% and ~27.4%, respectively, of the combined company, with the remainder scheduled to be held by the public.
The combined company would be named T-Mobile and would have ~127.0 million subscribers. Sprint and T-Mobile would be able to add more jobs and deploy improved 5G (fifth-generation) networks. The planned merger would thus intensify the combined company’s competition with the top two wireless carriers in the country, Verizon (VZ) and AT&T (T).
The combined entity is expected to generate total revenue of $75.0 billion–$76.0 billion in fiscal 2018. Its total wireless service revenue is expected to be in the range of $53.0 billion–$57.0 billion in the year. The combined entity would have total adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $22.0 billion–$23.0 billion in the year, implying an adjusted EBITDA margin of 40.0%–42.0%. Additionally, the combined entity is expected to spend ~$10.0 billion–$11.0 billion on capex (capital expenditure) in the year.
Why the merger makes sense
T-Mobile and Sprint have a common aim: to catch up to the market leaders. In the first quarter, T-Mobile saw EPS (earnings per share) of $0.78, down 2.5% YoY, while Sprint posted EPS of $0.02 in its fiscal fourth quarter, which ended on March 31.
In fiscal Q4 2016, Sprint posted EPS of -$0.07. On an adjusted basis, Verizon posted EPS of $1.17 in the first quarter, a rise of 23.2% YoY. AT&T delivered adjusted EPS of $0.85 in the quarter, up 14.9% YoY from $0.74.
Sprint has high levels of debt as a standalone telecom operator, and a merger with T-Mobile could significantly reduce its costs by eliminating duplicate work roles. The companies would have also used their cost savings to invest in improving the network.
Further, a merged entity would be able to negotiate on prices with suppliers. The companies are also trying to build their customer base amid a saturated wireless industry and tough competition from Verizon and AT&T, which is waiting to get the approval for its Time Warner (TWX) merger.