Roller Coaster

Sprint Investors Are Overcome With Both Joy and Despair

The path to a completed deal with T-Mobile has a big potential roadblock.

Photographer: David Paul Morris/Bloomberg.

SPRINT CORP
+0.02
At Closing, May 18th
5.11 USD
T-MOBILE US INC
+0.25
At Closing, May 18th
56.93 USD

Sprint Corp. has agreed to be bought and nobody knows how to react. Here’s a visual representation of the chaos:

Crash and Dash

Sprint sold off Monday after investors drove up the stock heading into the weekend's deal announcement

Source: Bloomberg

Intraday times are displayed in ET.

Investors are running around like chickens with their heads cut off, but what exactly is happening here? Let’s break it down. 

Sprint’s stock shot up Friday in anticipation of its merger announcement with T-Mobile US Inc., but it shouldn’t have. By Monday, investors were paying the price for their overexcitement about a deal that still needs to go through the process of securing regulatory approval from a rather capricious U.S. government administration.

The companies formally announced the transaction over the weekend, yet there is practically no information we have now that we didn’t have last week. The fact of the matter is that Sprint should trade at a large discount to T-Mobile’s offer because of the substantial risk that regulators block the deal, leaving Sprint in an unenviable position and T-Mobile to go on its merry way. That’s one of the biggest takeaways from the merger announcement, as I explained on Sunday. 

If only for a moment, the deal hype distracted investors from Sprint’s bleak financial situation. This is a money-losing wireless carrier that’s suffered brand deterioration potentially beyond repair. It’s resorted to desperate promotions to attract new subscribers as a mountain of debt backed by its own spectrum licenses casts a shadow over the business. The deal with T-Mobile is a long way from the finish line, and should it fail, most investors probably wouldn’t want to be stuck owning Sprint at these levels. That’s why the shares are trading about 10 percent below the all-stock offer from T-Mobile, a fair spread for a deal with so much risk and an otherwise unattractive takeover target. 

Talking Sense

Sprint shares were overbought last week, given the company's financial challenges and the risk that the merger with T-Mobile collapses

Source: Bloomberg

Note: The deal is structured as a stock swap, so the offer value is a moving target.

The bond market is taking a more measured stance. Moody’s Investors Service said Monday that Sprint’s ratings are under review for an upgrade because under T-Mobile’s ownership, it’d benefit from lower costs, lower leverage, improved liquidity and greater scale. The more than $6 billion of estimated annual cost savings from successful integration of Sprint and T-Mobile will improve profitability and enable network investment in preparation for 5G technology.

Wait and See

Sprint bondholders aren't counting on a merger just yet

Source: Bloomberg

From a regulatory standpoint, now is arguably the best time for Sprint and T-Mobile to attempt a merger. They can argue that their deal won’t necessarily reduce the wireless industry from four to three major players because the landscape has changed. The Justice Department appears to be losing its case to block AT&T Inc.’s $109 billion takeover of Time Warner Inc., which means AT&T will be an even bigger threat and potentially inspire other media, pay-TV and wireless giants to seek megadeals of their own. The country’s two biggest cable providers, Comcast Corp. and Charter Communications Inc., are also both making inroads into the wireless space. Meanwhile, as the effects of cord-cutting worsen and TV-ad spending declines, Walt Disney Co. is vying for 21st Century Fox Inc.’s assets and CBS Corp. is negotiating a takeover of Viacom Inc. Those four are direct competitors, just like T-Mobile and Sprint are. But Sprint is worse off than all of them. 

Take the Money

Analysts have become increasingly pessimistic about Sprint's future

Source: Bloomberg

With the Trump administration pushing for investment in U.S. infrastructure and wireless technology, T-Mobile and Sprint can make the case that together they’ll have the resources to build a competitive 5G wireless network. Their lengthy press release was certainly written with Trump in mind, stressing that these next few years “will determine if American firms lead or follow in the 5G digital economy” and making the case that combining their businesses will lead to lower, not higher, prices for consumers.

I said it on Sunday, and I’ll say it again: A merger of Sprint and T-Mobile makes immense strategic and financial sense, but it’s merely an announcement at this stage and there’s no telling how regulators will view it. In the absence of a deal, it’s unclear why anyone would want to own Sprint shares. That reality is now hitting investors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Tara Lachapelle in New York at tlachapelle@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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