Sprint, T-Mobile hit brakes on merger again, BTIG believes latter has no reason to rush in

Every time it appears that the long-discussed merger between T-Mobile and Sprint is going to be official, another bump in the road shows up.
The most recent bump comes in the form of both carriers waiting until their quarterly earnings are posted later this month, according to a report. T-Mobile and Sprint are reportedly putting the finishing touches on a merger that could be announced once the third-quarter results are released. However, Bloomberg recently reported the two sides may not be able to close out the deal in that timeframe and it could be another two to three weeks before an official announcement is made.
While many in the industry are anxiously waiting for the two companies to become one, there’s at least one analyst who believes T-Mobile should continue to take its time before finalizing any deals with Sprint.
That analyst is BTIG Research’s Walter Piecyk. According to Piecyk, T-Mobile investors are curious to why the carrier would go into an “at-market” merger with Sprint when there’s such a disparity between each company’s spectrum holdings. Sprint has an impressive 2.5 GHz spectrum, which is believed to be a key factor in any deal, but Deutsche Telekom, Sprint’s parent company might not see that spectrum as valuable as the public does, especially when it’s put up against T-Mobile’s current existing spectrum portfolio.
“We believe Deutsche Telekom would have to assign over $20 billion of value to Sprint’s ‘excess spectrum’ and net operating losses (NOLs) in order to justify an ‘at market’ merger between T-Mobile and Sprint,” Piecyk wrote on BTIG’s blog. “However, we do not believe that an adjustment for spectrum is merited as T-Mobile brings its own ‘excess spectrum’ to the table and that spectrum is actually more critical for a successful combined enterprise. T-Mobile investors are therefore appropriately concerned about the risk of an ‘at-market’ transaction with Sprint.”
T-Mobile spent more than $1 billion on 700 MHz A block licenses from a few companies in specific markets last year. Earlier in 2017, the carrier spent $8 billion on 600 MHz licenses in the federal communications commission’s (FCC) incentive auction.
Meanwhile, Sprint’s 2.5. GHz spectrum is viewed as a crowned jewel in the industry because it can move large amounts of data quickly, but also has a blemish in the fact that it requires more network densification because it does not propagate as well as other lower bands can. While a portion of the spectrum may be used to deliver quicker speeds, a lot of it will probably be put towards wireless backhaul use, according to Piecyk, which will keep it from being, “an excess, sellable asset.”
T-Mobile on the other hand has built a formidable collection of midband spectrum, which Sprint has not been able to match. This could make Sprint feel like it needs to finalize this merger just to stay afloat financially, but Deutsche Telekom has put itself in a position where it feels little to no pressure to make any deal it does not want to. There are also other options for T-Mobile to explore if it should find itself wanting to acquire high-band spectrum.
“T-Mobile does not need a merger with Sprint to succeed, but Sprint might need one to survive,” Piecyk said. “Sprint has done a great job cutting costs and reducing churn, but there are long-term impacts to its lack of capital investment and lack of deep low-band spectrum position. We expect that to manifest in higher churn, lower gross additions and ultimately reduced cash EBITDA in future years. We are also skeptical that Charter or others have an interest in Sprint. Meanwhile, T-Mobile has an opportunity to buy or lease additional spectrum from Dish or utilize the CBRS band if they cannot gain access to Sprint’s 2.5 GHz spectrum.”
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