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T-Mobile-Sprint Merger: Renegotiate Terms?

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The deadline for T-Mobile (TMUS) and Sprint (S) to extend their $26.5 billion proposed merger agreement passed on November 1. In April 2018, T-Mobile and Sprint announced that they planned to merge. More than 18 months have passed since the two companies made this announcement, but there’s still no end in sight.

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Antitrust regulators approve the T-Mobile and Sprint merger

The US Department of Justice and the Federal Communications Commission (or FCC) conditionally approved the merger deal between T-Mobile and Sprint. These conditions include divesting Sprint’s prepaid businesses and spectrum assets to satellite television provider Dish Network (DISH) for $5 billion.

T-Mobile and Sprint promised the FCC that they would deploy a 5G network across the US. The two wireless carriers also committed to offering high-speed mobile broadband services.

However, the T-Mobile and Sprint merger still faces a court challenge filed by the District of Columbia and attorneys general from 17 states. The multistate lawsuit argues that the combination of the third- and fourth-largest wireless carriers could harm competition in the wireless industry. The transaction could also drive up prices for wireless consumers and slow down innovation. The start date for the trial is December 9.

T-Mobile and Sprint argue that the merger deal could help them gain scale and rapidly deploy a 5G network nationwide. T-Mobile CEO John Legere expects to complete the merger deal in early 2020.

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Renegotiation of T-Mobile and Sprint merger terms

According to a November 5 FierceWireless report, T-Mobile’s parent company, Deutsche Telekom (DTEGY), is urged by analysts at LightShed Partners to renegotiate the terms of the merger contract due to “further erosion at Sprint and rising costs of the transaction.” The report added, “A lower price paid to Sprint could actually help companies’ case with the states that sued to block their deal.”

Many believe that T-Mobile is seeking Sprint’s 2.5 GHz spectrum band in the merger deal. However, analysts at LightShed Partners believe that “Sprint’s spectrum would be available for lease or purchase if the deal were to fail. Plus, alternative spectrum options are looking better, according to LightShed, pointing to positive developments around the C-band.”

The renegotiated T-Mobile and Sprint merger deal isn’t likely to impact the terms of their settlements with the antitrust regulators.

Moffett Nathanson analyst Craig Moffett thinks that Sprint’s dire situation could help its case with the attorneys general. Moffett added that if the merger deal doesn’t go through, Sprint will likely sell spectrum or restructure its business.

Financial performance

T-Mobile is fundamentally strong, and it has led the wireless industry in customer and revenue growth over the last few quarters. In the third quarter, T-Mobile posted total revenues of $11.1 billion, which implies a YoY (year-over-year) rise of 2.0%. The company’s revenues missed analysts’ estimate of $11.3 billion.

T-Mobile posted adjusted earnings per share of $1.01, which increased 8.6% YoY and beat analysts’ estimate of $0.96. The company reported 754,000 postpaid phone customer net additions in the third quarter. T-Mobile has led the wireless industry in postpaid phone customer net additions in the last 23 quarters. It also reported a third-quarter record-low postpaid phone churn rate of 0.89%.

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Comparatively, Sprint’s wireless service revenue is declining due to customer losses over the last few quarters. Sprint didn’t have an impressive September quarter performance. The telecom company’s revenues and EPS were below analysts’ expectations. Sprint reported earnings per share of -$0.07 on revenue of $7.8 billion.

In the quarter ended on September 30, Sprint posted wireless service revenue of $5.0 billion, which implies a YoY decline of 8.2%. To add to the pain, the company reported net losses of 91,000 postpaid phone customers. In the US wireless industry, Sprint’s churn rate is still the highest. The company reported a postpaid phone churn rate of 1.91%.

Analysts’ ratings

Notably, 81% of analysts surveyed by Reuters covering T-Mobile rated the stock as a “buy” or “strong buy.” The remaining 19% rated it as a “hold.” Analysts have a mean price target of $89.74 for T-Mobile stock, which suggests upside potential of 9.6% from its current levels. Read Does T-Mobile Stock Have Any Upside Potential? to learn more about analysts’ ratings.

Analysts look cautious on Sprint. Among the 17 analysts that cover the stock, 82% recommend a “hold.”

Stock returns

On November 6, T-Mobile stock rose 0.48% and closed at $81.86, with a market cap of $70 billion. Currently, the stock is trading 3.9% below its 52-week high of $85.22 and 36.5% above its 52-week low of $59.96. T-Mobile stock has returned 28.7% year-to-date.

Sprint and AT&T (T) also rose year-to-date, gaining 5.7% and 37.5%, respectively. In the third quarter, AT&T’s performance was mixed. Its revenue fell 2.5% YoY to $44.6 billion and missed analysts’ forecast of $45.0 billion. On the upside, its EPS rose YoY to $0.94 from $0.90 and beat analysts’ estimate of $0.93. The company added 101,000 postpaid phone net customers.

Check out T-Mobile and Sprint Merger Nears Completion and Will Sprint Stock Jump Following Merger Approval? to learn more.

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