News broke this week that Sprint (NYSE:S) is putting together a formal bid for smaller rival T-Mobile (NYSE:TMUS). Speculation has persisted for months, which has triggered public opposition from regulators trying to preemptively warn the two companies. Sprint may offer $40 per share in cash and stock, which values the total deal at around $49 billion including net debt. The equity portion would be valued at $32 billion.
If things fall through, Sprint could be on the hook to pay a $1 billion termination fee. That could indicate that Sprint acknowledges the regulatory risk, and wants to limit its downside. In contrast, AT&T's failed attempt to acquire T-Mobile in 2011 involved a $3 billion cash payout in addition to handing over some AWS spectrum. Depending on how the spectrum is valued, that total bill could have cost AT&T upwards of $6 billion.
Sprint and T-Mobile will argue that they can increase competition in the domestic wireless industry, but regulators will just have to take their word for it. Becoming a massive player may inherently reduce the incentive to compete aggressively, but only time will tell if Sprint and T-Mobile follow through.
In this segment of Tech Teardown, Erin Kennedy discusses Sprint and T-Mobile with Evan Niu, CFA.
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Erin Kennedy owns shares of Apple. Evan Niu, CFA owns shares of Apple. Evan Niu, CFA has the following options: long January 2015 $460 calls on Apple and short January 2015 $480 calls on Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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.