Analysts State Sprint & T-Mobile US Merger Unrealistic

The political ramifications of a change in American government will take some time to be fully understood, but this means that for the time being we are seeing investors (and industry pundits) becoming excited about the potential opportunities for companies under a Republican government rather than a Democratic one. One of these opportunities is that of a merger between America's third and fourth largest carriers, T-Mobile US and Sprint, owned by Deutsche Telekom and Softbank respectively. In 2015, T-Mobile US overtook Sprint to become the third largest US carrier but both businesses have steadily been stealing customers from the larger two carriers, AT&T and Verizon Wireless.

More than a few years ago and around the time of the SoftBank acquisition of Sprint, the Japanese company also hoped to acquire T-Mobile so that they might be able to better compete with Verizon and AT&T as the two largest carriers in the US. However, hopes of this deal were effectively quashed when American regulators explained that they were fundamentally opposed to such a merger. As we now know, T-Mobile US changed how it ran its business, becoming the Uncarrier in 2013 and tackling the market in a different way. T-Mobile's Uncarrier set up has proven to be a disruptive influence in the market, as the carrier has steadily grown in subscriber numbers. However, some investors and commentators now believe that under the new administration from 2017, a merger between Sprint and T-Mobile US could again be on the cards. We've seen stock prices of both carriers climb as investors have bought up stock on this speculation, especially as SoftBank announced it was to invest $50 billion into North America in order to create 50,000 jobs. President-elect Donald Trump made this announcement explaining that SoftBank's Chief Executive Officer, Masayoshi Son, "would never do this" had he not been elected.

One story doing the rounds was that this $50 billion was the sum necessary for SoftBank to buy T-Mobile US, take on it's 50,000 staff and deploy 5G networking but research analyst MoffettNathanson does not believe that this merger makes financial sense. In this research note, MoffettNathanson explains that once the distortion is removed because of way each business accounts for handset leasing, Sprint's stock has a significantly higher premium compared with T-Mobile US. MoffettNathanson explains: "Perhaps the market will never go through the effort to figure out just how large these distortions are, but T-Mobile and its parent Deutsche Telekom certainly will." Essentially, Sprint's stock price is so high that it is not an attractive business to buy. The analyst explores other scenarios where SoftBank directly buys T-Mobile US, based on the premise that the new administration will allow this merger, but the biggest problem here is in SoftBank being able to afford the deal. MoffettNathanson believes that this deal would pose a technical challenge for the Japanese company.

The final, and very important points, are that T-Mobile US appears to be performing well as it tackles the US market. Sprint is making something of a recovery having solidified its financial position and is making inroads into subscriber numbers, which means the US regulators may not see a strong enough argument that these two businesses need to combine in order to effectively compete with AT&T and Verizon.

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David Steele

Senior Staff Writer
I grew up with 8-bit computers and moved into PDAs in my professional life, using a number of devices from early Windows CE clamshells and later. Today, my main devices are a Nexus 5X, a Sony Xperia Z Tablet and a coffee cup.
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