Tim Mueller’s Transaction Analysis: New IT M&A Deals May 2

T-Mobile, Sprint Shares Take a Hit Following Proposed Blockbuster Takeover

Financial Information*

  • Transaction Value $26.5B
  • EV/LTM Revenue 1.79x
  • EV/LTM EBITDA 5.19x

Transaction Facts

  • T-Mobile US (Nasdaq: TMUS) and Sprint Corporation (NYSE: S) announced yesterday their definitive agreement to merge in an all-stock transaction at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each T-Mobile share — implying a a total value of approximately $26.5B.
  • Based on Friday’s closing prices, this represents a total implied enterprise value of approximately $59 billion for Sprint, and $146 billion for the combined company.
  • Though management for both companies projected run rate cost synergies of over $6 billion, representing a net present value of $43 billion in synergies, investors have not reacted positively following the news. Sprint shares fell around 14 percent, while T-Mobile shares fell around 4 percent today — suggesting the market’s skepticism over the companies’ ability to obtain regulatory approval.
  • The combined company will be named T-Mobile.

Beyond the World of Telecom

  • Regulatory Hurdles: T-Mobile and Sprint, the nation’s third- and fourth- largest wireless companies, attempted but failed to combine in 2014 under the Obama administration; the Justice Department’s Antitrust Division and the FCC both blocked it. It is not yet clear how this deal will play out under the Trump administration, which sued to stop AT&T’s proposed acquisition of Time Warner earlier this year. Taking a major competitor out of the market will effectively bring the cellular service market down to only three options: Verizon, AT&T, and T-Mobile.
  • Business-Friendly: T-Mobile and Sprint, however, maintain that the deal will be pro-competitive by creating a new rival in a market that is essentially a Verizon and AT&T duopoly. As of late, Verizon has been performing well, reporting a rise of 32 percent in first-quarter net income last week, while AT&T reported a decline of 3.5 percent.
  • Setting A Precedent: The deal has greater ramifications beyond the telecom space and could set the stage for how future blockbuster M&A deals play out. First, how AT&T’s battle with the Justice Department over its bid for Time Warner could be the precedent that affects T-Mobile’s plan. There are notable differences, however: the AT&T/Time Warner case involves a vertical deal that joins two companies not in direct competition against each other, while the Sprint/T-Mobile case is a horizontal deal combining two direct competitors in a tight market. Horizontal mergers are more likely to face deeper scrutiny.
  • Debt Pile: Sprint’s high enterprise value, relative to its equity, stands out, especially considering the company’s debt. At the end of 2017, Sprint had nearly $33 billion in long-term debt. Being under a much larger asset pool and a stronger liquidity profile as a result of the deal may give Sprint the boost it needs. However, according to a joint company presentation yesterday, the combination will produce a total debt of as much as $77B.
  • Consumer-Centric: Both companies stressed the deal would be able to accelerate its efforts to implement a broad and deep 5G network as wireless, video and broadband converge. Citing statistics that T-Mobile deployed nationwide LTE twice as fast as Verizon and three times faster than AT&T, the company expects better end results for the consumer. In addition, both companies vowed lower prices through increased competition. In the past, T-Mobile aggressively cut prices by offering bargain plans with no contracts, and gained market share as the overall cost of wireless service decreased notably. According to government statistics, the cost for service decreased 19 percent in the last five years.

For more information about this transaction, click here to read the press release.

*Financial information from the press release and FactSet.

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