If Sprint and T-Mobile Merge, Buy AT&T

AT&T might be the biggest beneficiary of a Sprint/T-Mobile merger.

Jan 6, 2014 at 12:00PM

Investors seem to be anticipating further consolidation among wireless carriers. Reports suggest Sprint Nextel (NYSE:S) may be considering an offer for T-Mobile US (NASDAQ:TMUS). While a combination between the third and fourth largest U.S. wireless providers might be a good move for those involved, industry giants AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) may end up being the bigger winners. 

Does a Sprint/T-Mobile combination make sense?
The wireless provider space looks ripe for deal-making. Industry leaders AT&T and Verizon, each well over three times the size of their next largest competitor in terms of revenue, have a huge competitive advantage due to their scale. The laggards, Sprint and T-Mobile, need to grow in size to offer meaningful long-term competition. So, news that Japanese telecom giant SoftBank, majority owner of Sprint, might be looking to acquire a major stake in T-Mobile shouldn't be a huge surprise. Senior executives at both Sprint and T-Mobile have already gone on record, stating that such a deal would create a "logical ultimate combination" and that three large-sized national wireless companies would provide more industry competition than the current configuration.

While the joining of Sprint and T-Mobile would provide needed competitive scale, it would also be a very cumbersome process. Both companies are already in the midst of large capital-intensive network upgrades, which would increase integration complexity. Sprint is nearly done with a three-year major improvement project, dubbed "Network Vision," which aims to completely renew its 3G network and deploy an improved systemwide 4G LTE service. In addition to that undertaking, the company is also working on how to best deal with its summertime $3.8 billion Clearwire acquisition. Meanwhile, T-Mobile has also been renovating its network. The company has brought a state-of-the-art 4G LTE system into 40 of its top 50 metropolitan areas, while also migrating acquired MetroPCS brand legacy customers onto the service.

The difficulties in aligning and blending Sprint and T-Mobile's operating infrastructure are hard to assess, but the process would assuredly be complicated. Financial stress from the potential merger would likely make a smooth transition even tougher. A company combination, estimated to be funded by around $19 billion in debt, would make the resulting entity highly leveraged. At an intimidating debt-to-sales ratio of near 1.15 times, the united firm might have to consider borrowing pay downs as the top priority.

Reaping the benefit of a complicated combination
AT&T may end up being the biggest beneficiary of a Sprint/T-Mobile union. Without any significant financial stress of its own, having a debt-to-sales level around 0.59 times, the phone giant may feel free to pressure the distracted competition. AT&T is already trying to poach T-Mobile customers with a recent offer of up to $450 per line for switching carriers. Touting its larger and more reliable 4G LTE network, a superior smartphone line-up, and award-winning customer service, AT&T's proclamations will only become more vehement in the midst of a messy Sprint merger.

Rather than making a massive assault on the competition, the company also has the option to sit back and reap the benefits of a consolidated industry. While consumer phone service pricing may not change much, the resulting "big three" wireless carriers will certainly look at reducing cell phone subsidies. These substantial payments to phone makers are a major cause of stifled provider industry profits. AT&T might also view Sprint/T-Mobile turmoil as the chance to make a synergistic acquisition of its own, possibly of a European target, where initial carrier consolidation may be on the horizon.

What about Verizon?
It seems reasonable to assume that Verizon might equally benefit from a Sprint/T-Mobile merger. Verizon has considerable industry clout. It owns the nation's largest 4G LTE network and generated over $39 billion in wireless sales for the first half of 2013 alone. Given the opportunity, this phone behemoth has all the tools necessary to take full advantage of any missteps by Sprint or T-Mobile.

Verizon may have been the best investment candidate in light of industry consolidation, except for its $130 billion buyout of Vodafone Group's stake in the wireless business. Agreeing to pay out at least $59 billion in cash, $60 billion in stock, and other contingent amounts, Verizon now gets full ownership of Verizon Wireless. But, the hefty price tag forced the company to initiate the largest corporate debt offering ever, a $49 billion bond issuance that more than doubled the previous record of $17 billion.

Share dilution and a debt-to-sales ratio around 1.14 times resulting from the Vodafone transaction puts Verizon under some pressure. The firm may have to be more inclined to use its substantial free cash flow for stock buybacks and debt reduction, rather than on taking advantage of a Sprint merger.

Further industry consolidation among wireless carriers appears likely, and a Sprint/T-Mobile merger seems logical. But, the possible combination will not be an easy endeavor. If the deal can surmount governmental antitrust concerns, integration issues may end up presenting competitors like AT&T and Verizon an opportunity to expand their market share. Once definitive news about a Sprint/T-Mobile union hits the headlines, longer-term investors may want to consider AT&T as one of the best ways to play continued wireless industry consolidation.

Profit from the smartphone revolution
Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."

Bob Chandler has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information