Will a Merger With T-Mobile Reward Sprint Shareholders?

With rumors and speculation swirling around a potential merger between Sprint (NYSE: S  ) and T-Mobile US (NYSE: TMUS  ) , a big question is whether such a move would reward shareholders. In theory, consolidation in the wireless space should eliminate the aggressive pricing in the sector and benefit the remaining companies.

Based on the recent consolidation to three major legacy airlines, the airline sector is stronger and more profitable but not all of the players are performing the same. In addition, the consolidation in the wireless sector would leave AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) as dominant players with the new Sprint a very distant third.

Price to sales tells the story
A basic method to gauge whether a stock has upside potential from multiple expansion if the company improves operations and costs controls is the basic price-to-sales multiple. In the wireless case, the combined Sprint and T-Mobile trade at substantially lower multiples of sales than the market leaders of AT&T and Verizon. If the merger were to make Sprint an equal in the sector and allow for margin growth and huge profits, then Sprint could see a significant gain from it.

S PS Ratio (Forward) Chart

S PS Ratio (Forward) data by YCharts

The above chart is very suggestive of stock gains in Sprint, but a quick review of the airline industry suggests that investors shouldn't rush into the company's stock. Currently, Delta Air Lines trades with a price-to-sales multiple of roughly double that of United Airlines. Both airlines compete in the suddenly consolidated airlines sector, but United can't generate the same level of profits.

Sprint still bleeding cash
A big problem remains in the form of Sprint's inability to generate profits. The combined company would need to dramatically reduce costs to simply break even, much less record the profits and the cash flow needed to compete in the wireless world against AT&T and Verizon.

For the first quarter, Sprint reported operating income of $420 million that topped its performance for the last seven years, but the company still produced a net loss of $151 million. The loss combined with capital expenditures of $1.1 billion lead to free cash flow loss of $1.1 billion for the quarter.

The level of capital expenditure at Sprint is a major concern going forward considering that the company is going to compete against Verizon; that company averages spending $4 billion on a quarterly basis and is targeting up to $17 billion for the full year.  AT&T expects to spend an even larger $21 billion on capital expenditures for the year, with the majority of that focused on wireless. The additional spending provides the company with converged offerings of landline and pay-TV services that offer an advantage over anything Sprint has to offer.

Bottom line
A merger between Sprint and T-Mobile has the potential to create a wireless industry where competition between the three remaining players isn't very intense. Unfortunately, the new Sprint would remain a distant third provider with meager margins and low capital expenditures in relation to the market leaders AT&T and Verizon. If anything, the larger two providers have the incentive to prevent Sprint from becoming an equal in the domestic wireless market. Based on the airline industry example, the prospects for Sprint obtaining higher multiples and hence stock gains aren't encouraging.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

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: 2995512, ~/Articles/ArticleHandler.aspx, 10/1/2014 6:57:46 AM

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...

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. 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!


Advertisement