Where's the Investment Value in Sprint Corporation's Bid For T-Mobile?

Credit: www.phonearena.com

Sprint (NYSE: S  ) Chairman Masayoshi Son recently presented his reasons for why a T-Mobile (NYSE: TMUS  ) acquisition was not only likely, but logical. Then, news struck that a bid for Sprint to acquire a 67% stake in T-Mobile USA was released, and on Wednesday we learned that a $40 per share bid was in play. However, the big question is where investors should put their money to work, and to answer that question, one can look closely at AT&T's (NYSE: T  ) recent history.

Here comes the official bid
According to Masayoshi Son, recent mergers and acquisitions by large telecom and cable providers, including AT&T, all but validate that Sprint should have no problem in acquiring T-Mobile USA. According to both Bloomberg and The Wall Street Journal, Son is putting this logic to test, placing a bid for T-Mobile at $40 per share, or $32 billion.

Reportedly, the offer will include half cash and half stock, and T-Mobile's parent company will then own 15% of the combined Sprint and T-Mobile. Sprint and Son are taking a large risk in trying to acquire T-Mobile, as regulators such as the Federal Communications Commission, or FCC, have already expressed doubt.

So where is the investment value?
Sprint already has a historical disadvantage in this fight, and when you combine the fact that Sprint's parent company is foreign, it's tough to imagine regulators allowing one-third of the national telecom business -- and loads of spectrum -- at the control of a single, foreign company. In addition, once you combine Sprint and T-Mobile, the outcome is a single telecom near the same size as its two larger peers.

Credit: wwww.money.cnn.com

The first reason is that T-Mobile remains far from the $40 per share bid price, at under $35. Investors are skeptical following the dilemma with AT&T. If Sprint is by some chance successful, there are obvious gains to be created.With all things considered, it might sound strange to suggest that T-Mobile is the best investment regardless of the outcome in Sprint's attempted acquisition. However, this is the case, and for two reasons.Not only would the acquisition combine the third- and fourth-largest national telecom companies -- dropping the total number to just three -- but it would also give Sprint valuable low-frequency spectrum to improve its network. Unfortunately, the FCC already blocked an attempted takeover of T-Mobile a couple years back by AT&T, saying it would be anti-consumer by removing one of the only four national carriers.

The second reason is a bit more complicated, and it also involves AT&T. Back in 2011, when AT&T's attempt to acquire T-Mobile fell apart, it had previously agreed to a breakup fee valued at $4 billion, which then later became worth $6 billion in cash and spectrum.

It was this fee that allowed T-Mobile to improve its network via spectrum while also spending money to improve its product offerings, plan packages, and to attract consumers to its service. Essentially, AT&T's investment built a more viable competitor.

Sprint will also have to pay a breakup fee, although not nearly as large. Currently, we don't know the cost, but many experts believe it will be $1 billion or more. Therefore, even if T-Mobile is not acquired, it still comes out on top, and considering its 60% stock gains in the last 12 months, the company will likely use that money to further boost its competitive edge against the very companies that are trying to acquire it.

Foolish thoughts
With all things considered, the telecom space as a whole has been a laggard in the last year, yet T-Mobile has traded with large gains and has greatly outperformed its peers with notable year-over-year revenue growth and profitability. As we look ahead, the most likely outcome is that Sprint will be unable to acquire T-Mobile, and will be forced to pay a breakup fee of some sort.

Then, it will continue to operate with substantial debt and net profit losses while losing subscribers by the quarter. On the flip side, T-Mobile is showing no signs of slowing down, and in retrospect, there's a reason that all of its peers want to acquire it, and that's because it's a solid company, with or without Sprint.

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  • Report this Comment On June 08, 2014, at 9:19 PM, LowellUkulele wrote:

    Neither Sprint nor T-Mobile is profitable. If the Feds don't allow them to combine, neither one has a bright future against the deep pockets of the duopolists. A combination of AT&T and T-Mobile would have created a company with a far larger marketshare. The Feds would be wise to look at marketshare than the number of carriers, since there are only two finanically healthy carriers at this time and they need a stronger challenger.

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