The Market Doesn't Believe in a T-Mobile-Sprint Merger

After settling at a(nother) record high yesterday, U.S. stocks are down slightly in early trading, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) falling 0.22% and 0.11%, respectively, at 10:15 a.m. EDT. Dow component AT&T (NYSE: T  ) is 0.5% lower this morning -- ostensibly on news that Sprint (NYSE: S  ) and T-Mobile  (NYSE: TMUS  ) are close to reaching a merger agreement that would combine the country's third- and fourth-largest wireless operators into a genuine competitor for the top two. There's more to it than that, however.

According to media reports, the approaching merger would value T-Mobile at roughly $40 per share and would require Sprint to pay T-Mobile more than $1 billion should the transaction fail (according to Bloomberg, T-Mobile shareholder Deutsche Telekom has been pushing for a $3 billion termination fee). The size of the fee suggests that Sprint Chairman and Softbank CEO Masayoshi Son is increasingly confident of his odds of success (Japanese Internet conglomerate Softbank is Sprint's majority shareholder).

The biggest hurdle standing between the two companies and a done deal: U.S. regulators. Indeed, AT&T paid T-Mobile a breakup fee worth between $4 billion and $6 billion after regulators nixed its takeover attempt in 2011. The line from regulators since then has been that the U.S. consumer is best served by four major carriers instead of three; officials point to T-Mobile's aggressive competitive behavior to vindicate their position. What has changed to suggest a tie-up between Sprint and T-Mobile might now be more acceptable to Washington?

For one thing, the telecommunications industry has not stood still since 2011, with consolidation beyond the boundary of pure telecom services blurring the lines between Internet and pay television providers. Two milestone transactions have been announced this year: Comcast's $45 billion offer for Time Warner Cable and AT&T's $$49 billion deal for DIRECTV.

Furthermore, while T-Mobile has proved a thorn in the side of Verizon and, particularly, AT&T -- to consumers' genuine benefit -- it's not clear that its aggressive price competition is a viable long-term strategy. T-Mobile lacks heft in an industry that requires regular, significant capital expenditures; regulators surely understand this.

Verizon shares dropped this morning (before inching into positive territory), which suggests investors consider that the combination of Sprint and T-Mobile is a threat, but the size of the decline indicates the threat is remote. That is confirmed by the fact that both Sprint and T-Mobile shares are also down so far Thursday. Finally, the discount between T-Mobile's price and the reported $40 per share also indicates the market doesn't have much faith that the companies will be able to complete a deal.

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