Sprint Should Bid for T-Mobile

Sprint is considering a potential bid for T-Mobile, which would consolidate the third and fourth largest wireless companies.

Jan 7, 2014 at 9:00PM

Sprint's (NYSE:S) potential bid for wireless rival T-Mobile (NASDAQ:TMUS) is an exciting prospect for investors. The acquisition would consolidate the third and fourth largest wireless companies in a deal that could be worth more than $20 billion, depending on Sprint's stake in T-Mobile. Investors are enthusiastic over the idea of an acquisition by Sprint, but many in the industry are skeptical and believe regulators would block such a deal.

The regulatory concern would be that the consolidation of Sprint and T-Mobile would reduce competition in the market. A merger by Sprint and T-Mobile would put the company at approximately 53 million postpaid customers. The merger would still result in significantly fewer than AT&T's (NYSE:T) 72 million and Verizon's (NYSE:VZ) 95 million postpaid subscribers. Some would argue that a larger Sprint would bring increased competition to AT&T and Verizon, which would be good for the market. It's unclear whether regulators would intervene if Sprint made a bid for T-Mobile.

Sprint looks to expand its network
A Sprint and T-Mobile merger would allow the companies to accelerate network investments like spectrum. In the wireless industry, spectrum is the limiting factor for future growth. An increased investment in spectrum would allow the company to take on more mobile users, expand coverage, and increase access to high-speed wireless data.

Sprint is growing its subscriber base. The company reported its best-ever postpaid service revenue of $5.8 billion for the third quarter of 2013. Sprint's overall revenue was reported at $7.31 billion in the third quarter of 2013, which was a slight increase compared to $7.29 billion in the third quarter of 2012. Sprint reported a net income of $383 million in the third quarter of 2013.

Investors should watch for Sprint to make a bid for T-Mobile. If the bid goes through, investors should watch how Sprint uses its new size to make strategic investments in the network. An expanding network should allow Sprint to offer new and improved services to subscribers, which should lead to expanding revenue for the company.

T-Mobile needs more spectrum
T-Mobile is trying to boost its high-speed network to support the increasing number of consumers using the web and streaming video on smartphones. The company plans to buy spectrum from Verizon at a value of $3.3 billion. The details involve paying Verizon $2.365 billion in cash and $950 million in spectrum.

T-Mobile needs to make these investments in additional spectrum to compete with AT&T and Verizon's high-speed data services. This is one of the reasons it would be a good idea for Sprint and T-Mobile to combine efforts in making investments in more spectrum. Limited spectrum is the true market constraint in the growth of the wireless market.

T-Mobile is showing amazing growth. The company reported revenue of $6.7 billion in the third quarter of 2013, up 37% from revenue of $4.9 billion reported in the third quarter of 2012. T-Mobile experienced significant growth from selling devices such as the Apple iPhone and the Samsung Galaxy.

Investors should keep an eye on T-Mobile's large investment in spectrum to make sure that it pays off. It's important that T-Mobile be able to expand the subscriber base for its high-speed data network to make money off of the deal. Look for T-Mobile to expand revenue as it grows its user base in the high-speed data market.

AT&T and T-Mobile deal blocked by regulators
In December 2011, AT&T ended a $39 billion bid for T-Mobile after the Justice Department sued to block the deal. At the time, the acquisition would have left AT&T and Verizon with the majority of the wireless market. AT&T was looking to gain T-Mobile's spectrum to expand its network to relieve congestion due to heavy data use by the company's iPhone users.

AT&T is currently showing modest growth. AT&T reported revenue of $32.2 billion in the third quarter of 2013, which is up 2% compared to the same quarter of 2012. The company is showing great profits. AT&T reported $0.72 earnings per share in the third quarter of 2013, which is a 14% increase compared to $0.63 earnings per share in the same quarter of 2012.

AT&T investors should keep a close eye on a potential Sprint/T-Mobile deal. Its important to identify how a larger Sprint would influence the wireless market and affect AT&T's sales. A larger Sprint may influence mobile pricing as well as availability of spectrum in the wireless market.

The bottom line
Sprint should make a bid for T-Mobile and see what happens. If regulators block the acquisition, then perhaps Sprint should move on. An acquisition of T-Mobile by Sprint would not only be good for the company, but also the subscribers. It would help expand the current network and improve company services.

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Ryan Sullivan 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.

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