T-Mobile Is in a Much Better Position Than Sprint
Undervalued T-Mobile has done a great job over the past four years gaining the majority of new wireless subscribers in the U.S.
On Nov. 4, T-Mobile US (TMUS) and Sprint (S) announced they have called off their negotiations to merge. The two firms could not reach an agreement on terms, which we assume relates to price and control of the combined firm. Since we have continually valued the two companies on a standalone basis, there is no change to our fair value estimates of $67 per T-Mobile share and $5.25 per Sprint share. We are also maintaining our no-moat ratings for both firms. We believe T-Mobile’s shares are undervalued and Sprint’s are overvalued.
We believe a deal would have helped both firms as it would have provided the scale necessary to compete long-term against Verizon and AT&T. Separately, we believe T-Mobile is in a much better position than Sprint. At the rumored deal price around the $7-$7.50 range Sprint had been trading at, we thought most of the value of the deal was going to Sprint’s shareholders. When the Nikkei first reported about a week ago that Softbank (Sprint’s controlling shareholder) was looking to back out of the deal if it didn’t have control of the new company, which Deutsche Telekom (T-Mobile’s controlling shareholder) had said wouldn’t happen, Sprint’s stock took a hit and we expect a further one when the market opens Monday. T-Mobile has done a great job over the past four years gaining the majority of new wireless subscribers in the U.S. While we expect it will continue to gain the majority of new customers in 2018, we think it will struggle to generate the returns needed to keep up with ongoing network investments funded by the much larger free cash flows generated by Verizon and AT&T. We believe Verizon in particular will use its extensive free cash flow to quickly roll out a 5G network, which will again reestablish the firm as having the best wireless network in the U.S.
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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.