T-Mobile (NASDAQ:TMUS) stock has spent the last months fighting to complete its merger with Sprint (NYSE:S), a deal that has become a partisan Washington soap opera. The question for investors is, what happens after the merger goes through?
Source: Mike Mozart via Flickr (modified)
CEO John Legere has been grilled by Democrats over the company’s use of the Trump Hotel, over where it gets its equipment and over what it does with data it collects from handsets.
But the deal will likely get done, if only because Democrats are now so opposed to it.
Legere’s Fight for TMUS Stock
Democrats argue the merger will cut the number of national wireless competitors from 4 to 3. T-Mobile and Sprint argue that three strong competitors are better than two strong and two weak ones. They also point to the wireless ambitions of competitors like Comcast (NASDAQ:CMCSA).
Throughout this decade, AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) have each controlled one-third of the U.S. wireless market. T-Mobile and Sprint share most of the other third. In arguing for the merger, Sprint notes the two larger companies have 93% of the industry’s cash flow, a shared monopoly the new T-Mobile would break.
The main change this decade has been T-Mobile’s rise at Sprint’s expense. The trend wore down Masayoshi Son, who took a controlling interest in Sprint in 2012 and had wanted his company to control any merger. Son is now focused on his $100 billion “Vision Fund,” buying big positions in companies like Uber.
Deutsche Telekom AG (OTCMKTS:DTEGY) owns about two-thirds of TMUS stock. The Sprint deal will reduce that. The combined company would be mainly foreign-owned, but no one foreign entity would have control.
The focus would shift to Legere, which is where he likes it. After taking command in 2012, he grew out his hair, threw leather jackets over t-shirts, and began the “un-carrier” campaign that finally brought Sprint to the table as junior partner. Legere has become an adept politician, and like any politician, he has spent the merger campaign making promises.
T-Mobile Will Be a Spectrum Buyer
Most of those promises have involved 5G, an encoding technology that lets carriers use a host of new frequencies. It can build markets from TV and intelligent devices to self-driving cars.
As part of its merger effort, TMUS stock is promising more, cheaper bandwidth for rural customers, a wireless replacement for cable or satellite TV, and stable prices.
To make this happen, Legere is promising to buy more spectrum, in the 24 GHz and 28 GHz range.
Using the new spectrum means lower power radios, but many more base stations since the waves attenuate so fast. T-Mobile is also fighting to get more C-Band spectrum, at between 4-8 GHz, against an alliance of satellite companies.
The Bottom Line
Right now, T-Mobile shares sell at a premium price to earnings multiple of 21.5, despite paying no dividend. AT&T and Verizon pay dividends yielding 6.5% and 4.5%, respectively.
The reason for the price is growth. T-Mobile revenues grew 3% last year. Investors are betting the Sprint merger will go through, giving it more than the $45 billion in combined operating cash flow the two companies earned last year.
T-Mobile is also seen as a more entrepreneurial company than any other wireless outfit. If a bus ran John Legere over tomorrow, the stock would tank. Fortunately, Legere prefers limousines.
To turn his big plans into reality, however, T-Mobile is going to need executive depth. Promises without execution are called failure.
Dana Blankenhorn www.danablankenhorn.com is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.