Shares of T-Mobile (TMUS) and Sprint (S) have been trading in a narrow range since last month. The uncertainty of their pending merger has driven their performances, pulling them down from the respective 52-week highs they saw in July. So far this year, T-Mobile has soared 25%, while Sprint is up about 17%.
The merger has been pending for more than a year now. So what should investors do amid this merger uncertainty? The on-again, off-again status of the merger has weighed on both stocks lately. Any increase in certainty related to the transaction’s success could boost optimism among investors. TMUS and S could continue to be range-bound until then.
Sprint investors could be among the major beneficiaries if the merger gets the go-ahead. The third- and fourth-largest wireless carriers, T-Mobile and Sprint, agreed to combine in an all-stock deal in April last year. The transaction was agreed upon at a ratio of 0.10256 T-Mobile shares for each Sprint share or 9.75 Sprint shares for each T-Mobile share held.
Sprint, the fourth-largest mobile network operator, is already struggling and has been generating losses for the last three quarters. It’s also been losing customers amid increasing competition. The company said earlier that the merger with T-Mobile would be the best outcome for it.
T-Mobile also emphasized Sprint’s financial weaknesses in response to the multistate lawsuit late last month. It also said that Sprint might not be able to compete as a standalone entity in the future.
Sprint’s huge debt pile is a big concern, and debt-servicing costs are hampering its profitability. Sprint has higher net debt than T-Mobile even though it’s less than half the size. Read Sprint’s Woes Look Bigger amid Pending T-Mobile Merger.
T-Mobile may stay strong
After the merger, T-Mobile is expected to save approximately $6.0 billion per year from combining operations. Also, T-Mobile will gain a significant customer base by merging with Sprint.
The combined entity will likely have approximately 120 million subscribers after divestitures compared to Verizon’s and AT&T’s 150 million each. T-Mobile’s larger size and scale after the merger will be an obstacle for Verizon and AT&T, the top two wireless carriers. Lower costs and economies of scale are expected to bode well for T-Mobile’s earnings growth in the long term.
T-Mobile has been thriving for the last couple of years. It’s posted average double-digit revenue growth in the last three years, surpassing its peers. Sprint’s debt burden could hamper T-Mobile’s profitability.
In the long term, T-Mobile stock has outperformed its peers largely due to its strong earnings growth. It’s returned almost 80% in the last three years, while Sprint has returned a meager 3%. Including dividends, AT&T has returned 8% in the same period.
According to CNBC, Oppenheimer said last month that T-Mobile would face a difficult integration with Sprint: “The stock could pop after the deal closes but will likely be dead money for two years afterward as the combined company works through integration.”
Critics’ take on the merger
Despite the US Department of Justice’s approval and the Federal Communications Commission’s support, the $26 billion proposed merger is still not in the clear. In fact, it’s facing a multistate lawsuit led by New York State Attorney General Letitia James.
State attorneys general are trying to block the merger on antitrust concerns. Critics argue that the merger would reduce the competition in the industry and would result in higher charges for customers. Read T-Mobile and Sprint’s Deal in Peril despite FCC Chair’s OK. The trial is set to begin on December 9.
Another obstacle for the merger could be employees’ concern for their jobs. T-Mobile workers wrote a letter to Deutsche Telekom’s CEO last week seeking job assurance. The merger could lead to job losses due to the overlapping of the company’s structure in the short term. However, T-Mobile CEO John Legere has said that the combined unit will create 11,000 jobs by 2024.
T-Mobile and Sprint stocks’ valuations
From a valuation standpoint, T-Mobile stock looks to be trading at a discount to its historical trend. It’s trading at a PS (price-to-sales) ratio of 1.5x, higher than Sprint’s 0.8x. We’ve considered the companies’ PS ratios to analyze their valuations because of Sprint’s losses in the last few quarters. The PS ratio indicates the amount investors are ready to pay per dollar of a company’s sales. It should be noted that the PS ratio could be of little help here because of Sprint’s large debt.
T-Mobile stock is trading at a forward PE ratio of 17x, much lower than its historical average valuation. In comparison, AT&T is trading at a forward PE ratio of around 10x.
So, in a nutshell, Sprint will likely get a bigger boost from its merger moving forward, while T-Mobile will benefit from the synergies in the long term. However, investors are likely eagerly awaiting the start of the trial in December.
Read T-Mobile: NYC Sues It for Rampant Sales Abuses for more of the latest on T-Mobile.