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


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.


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.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • 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.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2985346, ~/Articles/ArticleHandler.aspx, 8/31/2015 7:54:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated Moments ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
S $5.06 Down -0.13 -2.50%
Sprint CAPS Rating: **
TMUS $39.61 Down -0.39 -0.97%
T-Mobile US CAPS Rating: ***
T $33.20 Down -0.09 -0.27%
AT&T CAPS Rating: ****