Here’s Why Sprint Communications Inc. Shouldn’t Buy T-Mobile

In Sprint’s rumored bid for T-Mobile, the cons could very easily outweigh the pros as they stand today.

May 29, 2014 at 8:00AM

Pop quiz: What's the most surefire way to get what you want?

Answer: To have something someone else wants badly.

This basic refresher in supply demand dynamics holds major implications in one of the hottest storylines in the telecom space today -- Sprint's (NYSE:S) pursuit of T-Mobile (NASDAQ:TMUS).

With both Sprint and T-Mobile working behind the scenes to feel out regulators' attitudes about a possible combination of the U.S.'s third- and fourth-largest carriers, there hasn't been much in the way of encouraging news out of Washington regarding this deal. And, at least knowing what we know now, it could very well be in Sprint's and its shareholders' best interests to walk away from its T-Mobile deal before potentially shooting itself in the foot. Here's why.

No deal to be done?
Although only rumors, of course, the commentary coming out of Washington regarding Sprint's bid for T-Mobile has been overwhelmingly negative, so far.  And while some or all of this could prove to be opportunistic posturing from various regulators hoping to wring more concessions from Sprint, it's probably not a positive sign that a substantial, but still unnamed, portion of the oversight authority that Sprint will need to sign-off on this deal appears to be against its ever happening.

Although clearly acquisition hungry, SoftBank, which owns the majority of Sprint shares, and its billionaire, CEO Masayoshi Son, have pledged to not do anything "reckless" in the pursuit of T-Mobile. However, according to reports, Deutsche Telecom (NYSE: DT)which owns 70% of T-Mobile, is seeking a $1 billion breakup fee from Sprint should this deal fail to come to fruition. When considering both of the above factors, the combination of long odds and costly repercussions could, and probably should, make this deal unpalatable enough for Sprint to walk away from.

We've seen this from T-Mobile before
There's certainly a historical precedent at T-Mobile that should have Sprint investors wringing their hands. T-Mobile and Deutsche Telekom deftly negotiated a now seemingly insane $6 billion breakup fee as part of AT&T's failed acquisition bid in 2010-2011. As we know today, the deal ultimately caved in the face of insurmountable regulatory opposition, and the $6 billion in cash and wireless spectrum AT&T was contractually obligated to handover to T-Mobile helped sow the seeds of the turnaround we've seen take root during the past several years at T-Mobile. With the deck seemingly stacked to such a significant degree against Sprint's T-Mobile bid, the $1 billion break-up fee could be throwing good money after a bad deal.

The key risk in all this is that Sprint will inadvertently further strengthen T-Mobile by chasing a deal that never stood a chance, and consequently helping a company against which Sprint will need to compete going forward. This risk becomes all the more prominent given T-Mobile's recent resurgence. It simply isn't the telecom weakling it once was. In the last four quarters alone, T-Mobile has added more than 6 million subscribers, as its UnCarrier plan has clearly resounded with consumers fed up with higher fees from larger telecom incumbents like Verizon Communications and AT&T. And although few believe T-Mobile's steep-discounting tactics are long-term sustainable  versus bigger, deeper-pocketed rivals, a fresh $1 billion from Sprint could help T-Mobile in its mission to steal subscribers from the other three incumbents in the telecom space..

A moving target
There are plenty of moving parts as this key telecom storyline evolves, so it would be imprudent to dismiss Sprint's pursuit of T-Mobile as altogether fruitless at present. However, the real point in all this is to highlight the difficulty of the situation Sprint will have to navigate in order to pull off a T-Mobile acquisition. Sprint clearly wants to continue to snap up the quickly shrinking field of smaller telecom players to better compete against AT&T and Verizon.

But, as we've seen in the past, by pressing the issue too much, Sprint could end up making life harder for itself in the long term. It's a delicate balance that Son and Sprint CEO Dan Hesse will have to strike, and that's something Sprint and T-Mobile investors need to realize as this situation continues to materialize in the weeks and months to come.

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Andrew Tonner 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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