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T-Mobile and Sprint Merger Nears Completion

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On Tuesday, there was a big update for the T-Mobile (TMUS) and Sprint (S) merger deal. T-Mobile officially received regulatory approval from the FCC to acquire Sprint for $26.5 billion. The FCC approved the merger deal in a 3-2 vote split along party lines. However, the merger agreement still faces some hurdles.

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FCC approved the T-Mobile and Sprint merger

FCC Chairman Ajit Pai and two other Republican Commissioners, Michael O’Reilly and Brendan Carr, voted for the deal. Meanwhile, the two Democratic Commissioners, Geoffrey Starks and Jessica Rosenworcel, opposed the deal.

In a statement, Pai said, “The transaction will help close the digital divide and advance United States leadership in 5G, the next generation of wireless connectivity.” Within three years of the merger deal closure, T-Mobile and Sprint agreed to deploy a 5G network service to cover 97% of Americans and 85% of rural Americans. Within six years of the merger closing, the 5G network would cover 99% of Americans and 90% of rural Americans.

Within six years of the merger deal, T-Mobile and Sprint also promised to provide 90% of Americans with Internet speeds of greater than or equal to 100 Mbps. The companies will provide 99% of Americans with Internet speeds of greater than or equal to 50 Mbps.

The FCC’s merger approval is conditional on these commitments. The combined company could be penalized more than $2 billion if it doesn’t meet the promises.

Department of Justice approved the merger

In July, the Department of Justice announced that it reached an agreement to approve the merger deal between T-Mobile and Sprint. Under the settlement terms, the new T-Mobile agreed to divest certain wireless assets to pay-TV service provider Dish Network (DISH). According to a Bloomberg report on July 24, Dish Network agreed to acquire Sprint’s prepaid businesses like Virgin Mobile and Boost Mobile for $1.5 billion and a certain wireless spectrum for $3.5 billion. Dish Network would become the fourth-largest mobile operator in the US after the merger deal is complete.

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T-Mobile and Sprint merger concerns

T-Mobile and Sprint announced the merger deal in April 2018. Since then, they have been fighting for regulatory approval. However, the deal still faces a court challenge filed by a group of state attorneys general and the District of Columbia. The lawsuit is headed by California and New York. The states argue that the combination of the third and fourth-largest mobile operators in the US could harm the competition and lead to higher prices for wireless consumers. The combination could also result in job losses and slower innovation. There will be a court hearing early next month.

In October, Colorado and Mississippi left the multistate lawsuit after they reached agreements with the wireless carriers.

T-Mobile and Sprint are attempting to merge for the third time. In T-Mobile’s third-quarter earnings call, CEO John Legere expressed his optimism about closing the merger deal in early 2020. Read T-Mobile Provides an Update on Its Merger with Sprint to learn more.

In 2014, the Department of Justice and the FCC opposed the merger deal due to antitrust concerns. In 2017, the merger discussions collapsed because the two companies couldn’t reach mutually agreeable terms.

Financial performance

In the September quarter, T-Mobile’s sales rose 2.0% YoY (year-over-year) to $11.1 billion. The company reported a non-core EPS of $1.01 in the quarter. Analysts expected the firm to post a non-core EPS of $0.96. In the third quarter, T-Mobile gained 754,000 postpaid phone net customers compared to analysts’ expectations of 742,600 net additions. AT&T (T) gained 101,000 postpaid phone net customers, while Sprint lost 91,000 postpaid phone net customers.

AT&T generated net revenues of $44.6 billion compared to $45.7 billion in the third quarter of 2018—a 2.5% YoY reduction. The company reported a non-core EPS of $0.94 in the third quarter compared to $0.90 in the third quarter of 2018.

In the quarter ended on September 30, Sprint continued to report net losses.

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Analysts’ recommendations and target prices

Overall, analysts are positive about T-Mobile stock. Among the 21 analysts tracking the stock, 81% recommend a “buy,” while 19% recommend a “hold.” None of the analysts recommend a “sell.” The mean target price of $89.74 implies a 10.2% upside from the last closing price of $81.47 in the next year. The median target price was $93.00 on the same day.

Last week, there were several target price increases for T-Mobile stock after its third-quarter earnings announcement. RBC raised the target price from $87 to $94, SunTrust Robinson raised its target price from $80 to $95, while Keybanc raised its target price from $88 to $90. However, Cowen cut its target price from $93 to $87. Raymond James also cuts its target price from $95 to $94 on Tuesday.

Stock returns

On Tuesday, T-Mobile rose 0.68% and closed at $81.47. At the closing price, the company’s market cap was $69.7 billion. Currently, the stock is trading 4.4% below its 52-week high of $85.22 and 35.9% above its 52-week low of $59.96. On a year-to-date basis, T-Mobile stock has returned more than 28% as of Tuesday.

On the same day, T-Mobile stock closed 0.6%, 2.3%, and 3.7% above its 20, 50, and 100-day moving averages of $80.99, $79.60, and $78.55, respectively. The company’s 14-day relative strength index score of 54 indicates that the stock isn’t oversold or overbought.

Sprint and AT&T have risen 5.5% and 37.3%, respectively, year-to-date.

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