In April 2018, the merger deal was announced between T-Mobile (NYSE:TMUS) and Sprint (NYSE:S). However, the megamerger is still pending between the two telecom companies. T-Mobile agreed to pay $26.5 billion in an all-stock acquisition agreement with Sprint. The Department of Justice and the FCC officially signed off on the deal with certain concessions. The antitrust regulators approved the merger on the condition that Sprint divests its prepaid businesses and 800 megahertz of licenses to satellite TV provider Dish Network (NASDAQ:DISH). Dish will likely replace Sprint as the fourth-largest wireless player.
T-Mobile and Sprint merger
However, the telecommunications industry in the US is awaiting U.S. District Judge Victor Marrero’s decision. The judge will mainly determine whether Sprint will merge with T-Mobile. T-Mobile and Sprint merger deal was sued by more than a dozen state attorneys general on antitrust concerns. The states think that the merger would likely lead to higher prices for wireless consumers. The multistate lawsuit is led by New York and California attorneys general. In mid-January, the antitrust trial ended in the New York federal court. The judge will likely rule on the deal in the next few weeks.
According to a Barron’s report, “The states argue that it will take Dish years and billions of dollars to build a competitive nationwide network. The companies defended their merger by arguing that it would, in fact, increase competition by enabling New T-Mobile to better take on AT&T and Verizon—and that an empowered Dish would make a stronger competitor than if Sprint continued on its own.”
The report also said, “The reality is likely somewhere in between. Blair Levin, policy advisor to New Street Research and a former FCC official, gives the states 60-40 odds of prevailing.”
What are the merger odds?
A KeyBanc analyst thinks that the probability of the merger deal approval is at 50%, as reported by FierceWireless. The analysts at Cowen and Compay predict that the probability of the deal approval is at 40%, as reported by LightReading.
According to MoffettNathanson analyst, Sprint is likely heading for bankruptcy if the merger deal doesn’t go through, according to FierceWireless. The company reported net losses for the last five consecutive quarters. Sprint’s balance sheet is constrained with $34.1 billion of net debt compared to a market capitalization of around $20.3 billion. As a result, there isn’t much flexibility for Sprint regarding network investments.
Key takeaways from fourth-quarter earnings
In the fourth quarter of 2019, T-Mobile’s revenue rose 3.8% YoY (year-over-year) to $11.9 billion, which beat analysts’ estimate of $11.8 billion. However, the company’s adjusted EPS rose 16% YoY to $0.87, which beat analysts’ forecast of $0.83. T-Mobile’s revenue was boosted by its service revenue, which increased 6.3% YoY to $8.7 billion due to its postpaid revenue rising 8.1% YoY. The wireless player added 1.0 million postpaid phone net customers. The company also gained 77,000 prepaid net subscribers. In the fourth quarter of 2019, T-Mobile reported a postpaid phone churn rate of 1.01%.
In the third quarter of fiscal 2019, which ended on December 31, Sprint’s revenue fell 6.1% YoY to $8.1 billion. The revenue missed analysts’ estimate of $8.2 billion. During the quarter, the company reported an adjusted EPS of -$0.08, which missed analysts’ forecast of -$0.05. In the quarter, Sprint reported net losses of 115,000 and 174,000 postpaid phone and prepaid customers, respectively. The company reported a postpaid phone churn rate of 2.06% in the third quarter of fiscal 2019, which was the highest in the US wireless industry. To learn more, read Sprint Fights for Survival amid T-Mobile Merger.
In the fourth quarter of 2019, AT&T’s (NYSE:T) revenue fell 2.4% YoY to $46.8 billion, which missed analysts’ estimate of $47.0 billion. However, the company’s adjusted EPS rose 3.5% YoY to $0.89, which beat analysts’ forecast of $0.87. In the quarter, AT&T reported net additions of 229,000 and 8,000 postpaid phone and prepaid customers, respectively. The company reported a postpaid phone churn rate of 1.07% in the fourth quarter of 2019. Read Is AT&T Stock a ‘Sell’ after Its Q4 Earnings? to learn more.
Among the 22 analysts tracking T-Mobile, 18 recommend a “buy”—up from 17 the previous month. About four analysts recommend a “hold”—up from five the previous month. In the last 12 months, none of the analysts have recommended a “sell” on the stock. The mean target price of $93.68 for T-Mobile implies a 9.6% upside from its current $85.44. The median price target for the stock is $96.
As of February 7, AT&T and Sprint were trading at a discount of 2.5% and 21.5% from their respective target prices.
T-Mobile and Sprint’s stock performance
In the last 12 months, T-Mobile and Sprint stocks returned 25.1% and -16.4%, respectively. Meanwhile, the S&P 500 Index rose 22.9% in the last 12 months.
T-Mobile stock rose 3.2% and closed trading at $85.44 on February 7. The stock traded 0.4% below its 52-week high of $85.79 and 25.7% above its 52-week low of $68.00. Based on T-Mobile’s closing price on February 7, the stock was trading 5.2% above its 20-day moving average of $81.20. T-Mobile is trading 8.3% above its 50-day moving average of $78.91 and 7.8% above its 100-day moving average of $79.29.
Sprint stock also rose 4.7% and closed trading at $4.93 on February 7. The stock was trading 4.0% above its 20-day moving average of $4.74. Sprint is trading 3.5% below its 50-day moving average of $5.11 and 12.7% below its 100-day moving average of $5.65.
As of February 7, T-Mobile was trading at 18.72x analysts’ 2020 adjusted EPS estimate of $4.56 and at 15.55x analysts’ 2021 adjusted EPS estimate of $5.49. Meanwhile, AT&T was trading at 10.64x analysts’ 2020 adjusted EPS estimate of $3.62 and at 10.02x analysts’ 2021 adjusted EPS estimate of $3.84. AT&T stock rose 0.03% and closed trading at $38.45 on February 7.