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Why It's Now or Never for T-Mobile and Sprint

By Adam Levy – Apr 13, 2018 at 12:00PM

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A merger becomes less appealing with every month that goes by.

T-Mobile (TMUS -2.01%) and Sprint (S) are back at the negotiating table after merger talks fell apart in November. The two wireless carriers and their majority owners were previously unable to come to terms on who would control the combined company.

But if T-Mobile and Sprint are serious about joining forces, they can't let political issues slow down their progress. The clock on a potential merger started ticking as soon as the last round of talks ended. With each passing month, the value the companies can generate from combining slowly diminishes as both continue to invest in building out their networks and retail footprints -- with each often duplicating assets already owned by the other.

Closeup of a person's hands holding a smartphone.

Image source: Getty Images.

Act fast: Save $37 billion

One of the biggest value creators for Sprint and T-Mobile shareholders from the potential merger would be the synergies the combined company could realize by removing duplicate hardware from cell towers over time. At an investors' conference in January, T-Mobile CFO Braxton Carter said, "Very conservatively there were at least $37 billion of hard synergies, mostly primarily driven by the network."

But following the end of the last round of merger talks, Sprint CEO Marcelo Claure said investors could expect it to accelerate its network build-out and potentially surpass its previously guided capital expenditures of $5 billion to $6 billion.

Sprint signed new long-term contracts with cell tower companies to facilitate its build-out. A lot of that money wouldn't have been spent if the merger talks with T-Mobile had brought an agreement. That's money the two companies won't get back if they come to terms this time around.

As the two companies continue to invest to build out their networks and attract more customers, that $37 billion in synergies is dwindling. So, the faster they can get a deal done, the more they can realize in synergies.

A couple of big deadlines

If money isn't a big enough motivator, perhaps a bit of a time crunch will help.

At the Mobile World Congress earlier this year, Federal Communications Commission chairman Ajit Pai said he wants to start the 28 GHz spectrum auction in November, immediately followed by the 24 GHz auction. Those millimeter wave spectrum bands will be instrumental in developing 5G networks, and investors should expect participation from all the major telecom companies.

These auctions will require a "quiet period," which would prohibit merger talks between the two companies unless they both choose not to participate (an unlikely scenario). Considering the last auction took a full year to close bidding, it could be a long blackout for T-Mobile and Sprint. All the while, the synergies are dwindling.

At the same time, the two companies face political uncertainty as the 2020 presidential election nears. We could already be in the midst of primary season by the time the 28 GHz and 24 GHz spectrum auctions close.

While the Trump administration hasn't been as hands-off with potential mergers as originally anticipated, the likelihood of regulatory approval is probably higher under a Republican administration. And remember: Once the two agree to terms, it can take a while for a merger of this size to gain approval.

Putting their differences aside

Sprint and T-Mobile realistically have only a few more months to hash out a deal. Not only are they losing potential synergies as they wait, but there's a big potential political risk that all their talks will be for naught if they can't get a deal done before the next spectrum auction.

As such, it behooves the majority owners of each carrier to put aside their differences regarding control of the merged company and figure out something that they can live with. Is control really worth $37 billion?

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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