Sprint and T-Mobile: What’s Likely To Occur?

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Sprint (NYSE: S  ) is reportedly close to obtaining the $45 billion in financing needed to acquire the long-anticipated 67% stake in T-Mobile from Deutsche Telekom (NASDAQOTH: DTEGY  ) . While Sprint's stock is soaring higher by 8.4% on this news, investors might want to review a history lesson from AT&T (NYSE: T  ) on what's likely to come, and who is likely to benefit.

What's going on?
Any time a $45 billion acquisition is at stake, investors are going to get excited, and this is exactly what we're seeing as it relates to Sprint and Deutsche Telekom.

The buy price of $25 billion has been widely reported, but the problem for Sprint has been financing, as it must have funds available to cover T-Mobile's enormous debt load of $20 billion. Thus, financing the $25 billion acquisition might not be that difficult for Sprint and parent company SoftBank, but finding banks willing to take on the debt has been a challenge. But, that issue now seems to have been resolved with two banks willing to finance.

Why does Sprint want T-Mobile?
The $45 billion questions are whether Sprint should pursue T-Mobile, and why the company is willing to take such a risk?

First, this deal would significantly boost Sprint's spectrum ownership, even more so than what it had gained after purchasing Clearwire (spectrum allows data to move freely from one place to another). Additionally, the deal would combine the third and fourth largest U.S. wireless providers, giving Sprint 53 million post-paid subscribers, flexibility in pricing, a large presence. Plus, new network synergies would be created.

Will the acquisition happen?
However, this deal will more than likely never be approved. 

The FCC, which regulates such deals, has already expressed concern regarding the impact of this acquisition, specifically the reduction in the number of nationwide providers from four to three.

Moreover, this story already played out when AT&T tried to acquire T-Mobile in 2012, and the FCC blocked the deal. Granted, Sprint and T-Mobile are the third and fourth largest carriers, while AT&T and T-Mobile would have combined the second and fourth largest carriers in terms of U.S. subscribers. Some investors are willing to bet that the FCC will change its mind and allow the acquisition, once Sprint has its chance to defend the acquisition from a competitive standpoint.

Yet, the difference between now and when AT&T tried to acquire T-Mobile is that SoftBank now owns Sprint, which means a foreign company would control one-third of the wireless networks in the U.S. With Sprint, Clearwire, and T-Mobile, Softbank would own quite a bit of very important spectrum.

As a result, it is very difficult, if not impossible, to imagine a scenario where the FCC does not block this acquisition attempt.

What does this mean?
Considering Sprint's acquisition attempt from an investment perspective on all three companies, it's possible to identify completely different outlooks.

The AT&T outlook doesn't really change, as the company really only wanted spectrum with its attempted acquisition of T-Mobile, and later obtained additional spectrum by acquiring Leap Wireless last year.

For Sprint, investors are playing Russian roulette, because the stock is trending higher on the speculation of an acquisition, while the chances of it occurring do not work in the company's favor. As negotiations progress and an offer is made, Sprint will also have to agree on a breakup fee if the acquisition does not occur. For AT&T, it had to pay Deutsche Telekom $7 billion when the deal fell apart. While Sprint's breakup fee likely won't be as large, it will still be significant, and too much for a company with $33.5 billion in debt on its balance sheet.

Final thoughts
Finally, Deutsche likely welcomes acquisition attempts, because at the very least it will receive a nice pay day. This is a company that grew nearly 9% last year, pays a dividend of almost 6%, is priced attractively, and already has more than $10 billion of cash on its balance sheet. While its debt load is rather large, investors should feel encouraged that another failed acquisition attempt will likely bolster the company's balance sheet. Essentially, it's a win-win for Deutsche Telekom.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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