Recently, there have been reports that wireless carriers T-Mobile US and Sprint were considering a merger. Now, it appears its becoming more of a possibility, according to a Reuters report.
Talks of a merger between T-Mobile US and Sprint have been going on for weeks, but the carriers may be reaching a “major breakthrough” according to reports now that Sprint may be open to a stock-for-stock merger that would value it at or near its current price, according to FierceWireless’ Colin Gibbs.
If successful, the merger would be the first one in the United States with a major antitrust risk since President Donald Trump took office. The deal moving along could be a sign that the carriers are confident the country’s antitrust environment has taken a more favorable turn since they tried to merge in 2014.
Rumors have it that Sprint’s parent company, SoftBank Group Corp. would own approximately 40% of the merged company if the deal goes through. T-Mobile US’s parent company Deutsche Telekom would own the majority of the new enterprise, per sources.
Even though the deal is looking more likely, it’s not inevitable. There’s still a chance it could fall through, sources say. Both sides would have to do their due diligence on the other prior to the deal, which is expected to become official in late October.
“Both parties have long expressed an interest in a merger, though we believe valuation and the regulatory outlook proved to be stumbling blocks,” Mike McCormack of Jefferies Equity Research Americas recently wrote in a research note. “With press reports suggesting an all-stock deal at at-market pricing, we believe the valuation gap has narrowed significantly. Such reports also suggest SoftBank’s chairman is now willing to accept current market value, which could put even greater leverage in T-Mobile’s hands. While it appears an agreement on price could be near, we believe several considerations remain, including management structure and deal break, among others.”
The merger would put a combined Sprint and T-Mobile US company just behind Verizon and AT&T with more than 130 million subscribers. The carriers’ revenues would eclipse $70 billion, while analysts believe there would be a large scope to reduce expenses.
According to McCormack, the merger could yield synergies that could reach a $4.5 billion run rate by its third year. Although the companies could find substantial capex savings opportunities, once merged, the carriers would have ramp up network spending to make up for the “underinvestment at Sprint.”
“Given these assumptions, we anticipate meaningful accretion, with free cash flow per share nearly 44% higher in year three,” McCormack wrote. “Using multiple analysis, we believe T-Mobile (stock) could be worth more than $90 in a deal scenario.”
Both carriers have seen their shares increase late last week. Spring significantly so; its shares jumped five percent leading to a market capitalization of nearly $34 billion. Meanwhile, T-Mobile’s shares experienced a modest 0.4% uptick, which put its market cap at approximately $53 billion.
If the SoftBank Group had pulled of the merger in 2014, it most likely would have been the majority shareholder, but over the last three years, T-Mobile US has been the better performer under chief executive officer John Legere’s leadership. The shift in performance would allow for T-Mobile to grab the majority at this point if the deal goes through.
Moffet Nathanson analysts give the merger a 50/50 shot at success, according to Wireless Week’s Bevin Fletcher.
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