A lot can change over the course of two years. In the case of T-Mobile's (NASDAQ:TMUS) megamerger with Sprint (NYSE:S), the smaller carrier has seen its core business deteriorate over that time frame. Compared to Q1 of 2018 -- the quarter right before the deal was announced -- Sprint now has fewer postpaid phone connections, prepaid connections, and wholesale accounts. Postpaid phone churn has increased from 1.68% to 2.06%, and cash has dwindled to $3.2 billion while debt has increased by over $1 billion.


Q1 2018

Q4 2019

Postpaid phone connections

26.8 million

26.3 million

Prepaid connections

9 million

8.3 million

Wholesale and affiliate connections

13.5 million

12.1 million

Data source: SEC filings.

The prepaid business will be divested as part of the concessions the companies agreed to in order to secure regulatory approval, so those figures aren't as relevant, but there's no denying that Sprint is in bad shape. In fact, the federal judge who approved the deal this week cited Sprint's woes as supporting evidence. After describing a litany of strategic mistakes, Judge Victor Marrero concluded: "The Court is thus substantially persuaded that Sprint does not have a sustainable long-term competitive strategy and will in fact cease to be a truly national [wireless carrier]."

John Legere and Marcelo Claure sitting next to each other laughing

Image source: T-Mobile.

T-Mobile and its majority parent, Deutsche Telekom, are now expected to negotiate a lower price.

Pricing in a discount

Reuters reports that Deutsche Telekom is preparing to initiate talks with Sprint majority parent SoftBank in an effort to reduce the price tag of the deal, citing anonymous sources. The merger is structured as an all-stock transaction with a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share. Both stocks continue to trade with normal fluctuations, but the market is pricing in an expected discount.

For example, Sprint stock closed at $8.52 on Tuesday after Marrero formally approved the deal, while T-Mobile closed at $94.49. Based on the current exchange ratio, that should peg the value of each Sprint share at $9.69. In other words, investors were pricing in a 12% discount at Tuesday's close.

SoftBank has also found itself in a predicament following the high-profile implosion of WeWork, which substantially tarnished the Japanese tech giant's reputation. SoftBank reported Q4 results this week, and losses in SoftBank's Vision Fund, which includes WeWork, drove a 99% plunge in operating income last quarter.

Deutsche Telekom will easily have the upper hand at the bargaining table, even though it's unthinkable that T-Mobile would threaten to walk away from the deal after spending two years and hundreds of millions of dollars in merger-related expenses to overcome the regulatory and legal obstacles.

Sprint's saving grace could be spectrum. The No. 4 carrier still holds wireless spectrum that will be critical to 5G deployments, and those airwaves are worth an estimated $25 billion -- approximately 40% of Sprint's current market cap.

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