Sprint and T-Mobile: Calling For a Merger?

 | Feb 21, 2017 | 11:00 AM EST
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Reuters is reporting Japan's Softbank Group is prepared to give up control of Sprint (S) to T-Mobile(TMUS) which would allow the number 3 and 4 wireless players in the U.S. to merge. Should investors answer the call to merge?

Merging Sprit and T-Mobile has long been a dream for investors. A deal, if completed, has the potential to unlock serious value. Some analysts believe the combined companies could cut as much as $30 billion in expenses if a merger was approved.

Under the rules of the FCC 600 MHz spectrum auction, which ended on Feb. 10, the auction players are not allowed to discuss mergers and acquisitions. Once the auction winners are announced (in about two weeks) the restrictions will be lifted and the dealmaking can begin.

The wireless auction raised $19.6 billion -- and T-Mobile probably spent the most money at the auction, because it is quickly running out of capacity. Sprint's most-valuable asset is spectrum. The company holds 204 MHz of spectrum. Of that, 160 MHz is 2.5 GHz high band spectrum, with is ideal for data. That's more spectrum than AT&T (T) , Verizon (VZ) and T-Mobile.

Softbank owns about 83% of Sprint. It would no doubt like to dump Sprint, because of its poor financial position and inability to attract customers at profitable prices.

On Jan. 31, Sprint announced third-quarter fiscal 2016 results. The company posted a third-quarter loss of $0.12 per share, $0.02 worse than the consensus estimates. Revenue rose 5.5% to $8.55 billion.

Sprint remains on track to achieve its goal of reducing spending by $2 billion in fiscal 2016 and has plans for further reductions in 2017. It has achieved more than $1.6 billion of its targeted savings so far.

The company expects break-even adjusted free cash flow for the fiscal year. Adjusted EBITDA is expected to end the year in the range of $9.7 billion to $10 billion.

Sprint will end 2016 with approximately 59.5 million customers and T-Mobile claims 71.5 million. The companies tried to merge in 2014, but the Justice Department stopped any dealmaking between the top four companies.

With a new administration in power, T-Mobile and Sprint may be back at it. During the merger speculation in 2014, Sprint peaked at $10.79. With the stock $1.48 (15%) from that higher, I don't think it's worth the risk to chase Sprint on speculation the Justice Department will approve a merger this time around. After all, it's a long way back down to $3 per share if nothing happens.

I would not answer the call to speculate in a Sprint/T-Mobile merger.

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