MorningWord 5/19/17: Sprint to the Finish (TMUS, S)

by Dan May 19, 2017 10:02 am • Morning Word

Prior to news reports that Sprint and T-Mobile have entered preliminary merger talks (causing shares of Sprint (S) to spike 7%,) the stock was trading at a 6 month low and below its 200 day moving average for the first time since June 2016 (when the stock was about 50% lower:)

Bloomberg

You might recall that back in 2014 these two companies tried to merge but the FCC would not let them be, per NYT Dealbook:

But government regulators have made abundantly clear for months that they would oppose a combination of two of the four biggest phone service providers, discounting public arguments by SoftBank’s outspoken founder, Masayoshi Son.

“Four national wireless providers are good for American consumers,” Tom Wheeler, the chairman of the Federal Communications Commission, said in a statement on Wednesday. “Sprint now has an opportunity to focus their efforts on robust competition.”

At this point Sprint’s largest holder Softbank (83%), and T-Mobile’s largest shareholder Deutsche Telecom(64%) have little to lose by another crack at a combination when you consider that the number one and two wireless players AT&T (T) and Verizon (VZ) have been very acquisitive the last couple years. Given the quickly changing telecom and media landscape, the combination of the number 3 and 4 wireless players in the U.S. is likely a necessity, especially when you consider what T & VZ have been acquiring on top of spectrum.

T’s 2015 acquisition of DirectTV, and their hopeful $85 billion bid for Time Warner (TWX) would make a unique vertically integrated telecom and media giant. Verizon has been beefing up their internet advertising capabilities with AOL and Yahoo and the recent purchase of spectrum leads one to believe these assets will merely be building blocks for a broader telecom and media platform.

So have at it S & TMUS, this will likely be the first of many combinations for these two entities, as they will be forced to add TV, original content and other media offerings.

All that said, a combined S and TMUS as of today would have nearly a $90 billion market cap, with $74 billion in debt, $16 billion in cash, $22 billion in expected ebitda on $74 billion in sales.  T has a $233 billion market cap, $15 billion in cash, $133 billion in debt, expected $52.5 billion in ebitda on sales of $161 billion. S/TMUS would have some serious wood to chop on multiple fronts, it might prove to be a feat of financial engineering before they can make big strategic moves.