When it comes to wireless coverage provider Sprint (NYSE:S), the narrative over the past year-plus has been dominated by its proposed merger with T-Mobile (NASDAQ:TMUS). Long story short, the two companies proposed an all-stock merger back in April 2019 to turn the wireless coverage industry into a three horse race. Both boards approved the deal, and management teams at both Sprint and T-Mobile have been pointing to summer 2019 as the official closing date for this merger.
But, the deal has come under heavy regulatory scrutiny due to the lack of competitors in the wireless coverage industry. As a result, both T-Mobile and Sprint have promised big concessions in the event that the merger passes. Those concessions worked. On May 20, FCC Chairman Ajit Pai told Bloomberg that, in light of those concessions, he is going to recommend to his colleagues that they approve the merger. Sprint stock soared 25% in response.
Indeed, Sprint stock now just trades a few percentage points below the proposed takeover price.
In other words, the market is now saying that, with FCC approval, the Sprint/T-Mobile merger is essentially a done deal. On the opposite side of that argument, CNBC’s David Faber warns that the merger needs both FCC and DoJ approval. DoJ antitrust chief Makan Delrahim said as recently as late April that he has “not made up … [his] mind” on the merger yet.
Will the concessions and FCC approval change his mind? Probably. As such, Sprint stock will likely run higher from here until it hits the takeover price.
Odds of Merger Approval Are Close to 100%
At this point in time, the odds of merger approval for Sprint/T-Mobile are close to 100%. To understand why, we have to understand the context of the merger.
When the Sprint/T-Mobile merger was announced, many skeptics were quick to point out that this merger will have a tough time getting through the FCC and DoJ. After all, the wireless coverage industry only has roughly four relevant players. This merger would effectively narrow the industry into a three-horse race, and that opens up the threat of service provider collusion at the expense of the consumer.
In particular, Sprint and T-Mobile would combine to have a 42% market share in the prepaid market. That market is known for having lower income consumers. Thus, a Sprint/T-Mobile merger would open the door for those lower-income consumers to be taken advantage of through monopolistic pricing practices, especially against the backdrop of a 5G roll-out.
Because of these prepaid market collusion concerns, the FCC and DoJ investigations into the matter dragged on without any conclusion. Then, Sprint and T-Mobile made their concessions. The most notable of the concessions: a sale of one of the prepaid brands and a reiterated pledge not to raise prices during the three-year build-out of a 5G network.
In other words, T-Mobile and Sprint did exactly what they needed to with their concessions, which is reassuring regulators that the combined entity would not force higher prices on the consumer. The FCC was impressed, and that group will likely approve the deal soon. The DoJ hasn’t commented, but historically speaking, the FCC has a higher competitive standard than the DoJ. Thus, if the FCC approves, history says that the DoJ should approve, too.
Broadly, then, the odds of T-Mobile and Sprint merging into one company are very close to 100%.
Sprint Stock Deserves to Trade Above $8
The Sprint/T-Mobile merger is an all-stock transaction in which Sprint stock is valued at a fixed rate of T-Mobile stock. That rate? One share of Sprint equals 0.10256 shares of T-Mobile.
Right now, T-Mobile stock is trading around $80. Thus, the merger values Sprint stock at roughly $8.20. All else equal, that’s where the stock will head if the deal gets FCC and DoJ regulatory approval. However, pre-merger talks, Sprint stock was trading down near $4. If the deal falls through, that’s where Sprint stock will fall.
At the current moment, Sprint stock is trading around $7.80. That assumes 90% chance of approval (and a rally towards $8.20) and 10% chance of no deal (and a drop towards $4). At the current moment, those odds feel appropriate.
But, it also seems very likely that the odds move closer to 100/0 over the coming days as FCC and DoJ approvals come through the pipeline. Once they do, Sprint stock will rally towards $8.20, and potentially even higher if T-Mobile stock moves higher in tandem.
Consequently, it seems like only a matter of time before Sprint stock runs above $8.
Bottom Line on Sprint Stock
When it comes to Sprint stock, it’s all about the T-Mobile merger, and that merger just scored a huge win with approval comments from the FCC chair. At this point in time, odds of the merger going through are very high, and inching closer towards 100%. As those odds do inch closer to 100% over the next few days, Sprint stock should rally above $8.
As of this writing, Luke Lango was long S and TMUS.