Breaking Down the Possibilities for a T-Mobile/Sprint Merger

In this MarketFoolery podcast segment, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman open the week with a discussion of the serious merger talks between the No. 3 and No. 4 wireless carriers in the United States. If the two can hammer out a price and conditions, it would probably be a win on both sides. But each is controlled by an overseas entity with its own interests. Would John Legere be in charge, or would Masayoshi Son be pulling the strings from behind the scenes? Will Trump's antitrust regulators try to hinder this, or just let it pass? And what would this mean to AT&T and Verizon?

A full transcript follows the video.

This video was recorded on Sept. 25, 2017.

Chris Hill: Sprint (S) and T-Mobile (TMUS 0.57%) are maybe, possibly in the process of getting together. I have to give credit to David Faber at CNBC, who we've had as a guest on the Motley Fool Money show before. He's been doing a lot of legwork on this story. Here's where things are right now: Sprint and T-Mobile are entering into due diligence in what would be a stock-for-stock deal. They are hoping to reach an agreement in the next few weeks. This is, Jason, more complicated than just your typical potential merger, because there are controlling forces outside of T-Mobile and Sprint that are involved here. You have Deutsche Telekom, which, if this deal goes through, because they are the majority owner of T-Mobile, I think I have that right, they own a huge chunk of T-Mobile.

Jason Moser: They do.

Hill: They would reportedly be the controlling owner in this whole deal. But, also, SoftBank from Japan is involved on the Sprint side. Let's start with this. When you first saw this story, what was your reaction?

Moser: I think, generally speaking, it probably makes sense. When you look at this line of work, when you look at this business and you think, what's the main value in one of these carriers? Where does the value lie? And it's in the network. It's the size, it's the reach and the reliability of the network. So, the bigger the network is, the more reliable it is, the more subscribers you'll be able to pull in, and you'll continue to be able to invest in that network and more spectrum, and you become more and more successful as you grow, because you have the resources to be able to continue to grow that network. It's why AT&T and Verizon have done so well for so long. Generally speaking, they have two of the most reliable networks. They're obviously brand names that carry some sway with the consumer. Although, I don't think consumers are really necessarily as brand-focused here. Really, the bottom line is, you want a reliable network. It's just, for the longest time, AT&T and Verizon have communicated that. But, to your point there, there are a lot of pieces in play here. When you look at Sprint, it's controlled by SoftBank, which owns 83% of the shares outstanding there. Sprint, that's about a $34 billion market cap. With T-Mobile, that's controlled, as you said, by Deutsche Telekom. They own 64% of the shares outstanding. And that's about a $53 billion market cap. So, it's two very big companies. But when you look at them in comparison to AT&T and Verizon, AT&T has a market cap of $237. Verizon has a market cap of $203 billion. So, to me, I think this is something that more or less makes sense. I think this is something that probably needs to keep the leadership in Verizon and AT&T up at night, because this really does bring their biggest competitor to the market. And I think if you have someone like John Legere, who may be considered as the leader of this new venture, he's sort of your atypical CEO. He really takes to social media and defying convention in order to grow his business and communicate with the brand stands for.

Taylor Muckerman: Yeah, it really seems like A Tale of Two Companies. You have T-Mobile growing faster than its competitors, Sprint not so much. T-Mobile spending a bunch of money to grow, Sprint cutting costs. Now you're going to bring them together. T-Mobile has already been using Sprint's network for its customers. And you've seen T-Mobile be pretty innovative in the plans that it offers and the marketing that they deliver. And Verizon and AT&T have tried to answer that, and now it's going to be a little bit more difficult for them with bringing that scale that Sprint is going to offer them. And the money that they've been spending has come from failed previous M&A attempts. So, they've put that money to good use, and maybe they're trying to take advantage of some looser restrictions on antitrust with the new party in the White House.

Hill: I don't own any of these stocks, but selfishly, from an entertainment standpoint, I hope John Legere ends up running this company if this deal goes through. Although, in all seriousness, you look at SoftBank and the interest they would have in this company, if it goes through, and Masayoshi Son, who heads up SoftBank, is probably going to have some ideas of his own of how this should be led. And it may just be as simple as, "John, you're in charge, but you're going to take my phone call whenever I want."

Moser: Yeah, I would imagine. John Legere reminds me of a Jeff Bezos-style CEO in the sense that he seems to be, at least, very customer-centric.

Hill: He's a lot more outgoing than Jeff Bezos.

Moser: No question. He's got the slow cooker Sundays going. This guy is on my wavelength, so to speak. But that's where I think a real opportunity lies for a business like this, if you were to see this combined entity here. Someone who's just not afraid to get out there, defy convention a little bit, put a face on the brand. You can't really sit there and put a face on the brand of Verizon or AT&T.

Muckerman: Nope.

Moser: They have reputations for not-so-great service. And on the T-mobile side, you have a guy with John Legere, he's embracing social media, he's embracing customer-centric business. And I think that's a big advantage they could potentially play into here. I dug in, you know how we talk about always wanting to find these big long-term trends, invest in these big long-term trends, figure out ways to make money from these big long-term trends. I dug a little bit into this, and thanks to some great work from one of my colleagues, Paul Chi over on MDP did in regard to Verizon, we own Verizon in MDP today, and Cisco every year comes out with this white paper that goes over the mobile global traffic space, where it was, where it is and where it's going. And it's fascinating to look at the numbers here. If you look at global mobile traffic, it grew 63% in 2016 to 7.2 exabytes per month. "Now, Jason," you're saying, "What is an exabyte?" Well, you're in luck, I can tell you. An exabyte is actually about 1 billion gigabytes. You know the size of a gigabyte. That's what we base most of our plans on. So, think about 1 billion gigabytes. 7.2 exabytes. That's a little bit more than 7 billion gigabytes per month that's traveling around the world. It's projected by 2021 to hit close to 50 exabytes per month. So, there's this massive opportunity there in all of this global traffic.

Hill: It's going throw that much in four years?

Moser: That's what the projection is. And think about it this way, most of the world out there is still such an opportunity, because so many folks out there are still not yet connected. There are a lot of folks that are just getting onto the mobile network and figuring out the advantages of what mobile technology can offer. So, there is just this massive opportunity there in regard to the growth as far as the traffic goes. So, I think it's an opportunity for all three players. AT&T, Verizon, I think Sprint and T-Mobile pulling together here and becoming a really viable third player in this space. This gives them a real opportunity, because it's clear to see the long-term trend where it's headed.

Muckerman: Another area you could look at to take advantage of that is the tower operators. You have companies like American Tower and Crown Castle, you can't operate these networks without them. They're charging the network operators rent to basically hold their antennas in all the right places.

Hill: Really quick before we move on, how big a concern do you think is the antitrust issue, which, Jason, you talk about Verizon and AT&T being up at night. If I'm involved in the leadership of either of those companies, I'm absolutely screaming antitrust because this is the third and fourth largest telecom getting together. And even though if you just look at a pie chart, if this deal goes through, you're basically looking at a pie that's been cut in three pieces, they're each going to have about a third. So, on the surface of it, I look at it -- again, I have no skin in the game, I just look at it and think, "OK, everybody is essentially on equal footing." But it really does seem like the FCC and the Justice Department are going to take a long, hard look at this, and if nothing else, slow the deal down.

Moser: Yeah, I think you're right. I think they will go through this with a fine-tooth comb, and they'll make sure they dot all their i's and cross all their t's. But at the end of the day, I think this does nothing but really help the consumer. From that perspective, I don't understand why they would ultimately nix this deal. Bottom line, at the end of the day, with this huge long-term trend, a big world, plenty of opportunity and share to still grab out there, I think bringing another viable competitor in the space only makes sense.