Topline: After a federal judge on Tuesday approved the $26 billion merger between T-Mobile and Sprint, shares of both companies have already surged by 12% and 77%, respectively—with more upside still to come after the merger is finalized and the newly combined company begins to transition to 5G, according to one expert.
- T-Mobile has finally won approval to take over Sprint—putting the company on par with major network operators Verizon and AT&T, after defeating a lawsuit from state attorneys general which claimed the deal would hurt consumers by eliminating competition.
- Sprint stock soared by 75% on the news Tuesday: “Investors are pretty happy with this combination,” says Charles Lemonides, founder and chief investment officer of ValueWorks.
- He points out that Sprint shares are still trading at a 10% discount to the overall value of the deal, which “presents an opportunity” for further upside in the stock as the merger gets finalized in the next couple of months.
- T-Mobile stock also rose, jumping nearly 12% amid the merger’s approval: “The market seems to think that T Mobile is getting a good deal which [means] shareholders are excited about the merger,” says Lemonides. “That could give T-Mobile a little bit of a tailwind.”
- The two key drivers of value in acquiring Sprint is that it has existing subscriber relationships that will benefit T-Mobile, as well as a large stockpile of spectrum—radio frequencies that wireless signals travel over—which make up a significant portion of the company’s total value and will speed up the transition to 5G, according to Lemonides.
- The rise of 5G will further present an immense opportunity for T-Mobile and Sprint after they combine: “The importance of a wireless connection will go up exponentially—and that opens up a whole host of opportunities for these companies,” Lemonides says. “You’re not paying anything for that upside when you buy Sprint or T-Mobile stock today.”
Crucial quote: “Relative to other cell phone companies, you can’t find one as cheap [as Sprint stock],” says Lemonides. “We think that there’s growth in the business.” He emphasizes that as the transition to 5G provides more upside, it makes sense that the opportunities from that will eventually get priced into shares.
Key background: In terms of the competitive landscape, T-Mobile’s purchase of most Sprint customer accounts puts the company second behind Verizon. “I do think it’s fair to say that this merger will have a bigger impact on Verizon’s share price in the near term than AT&T’s,” Lemonides describes, pointing to the fact that AT&T has struggled in recent years and this is just one challenge out of many. Verizon, on the other hand, “has had a clear center lane” until now—and will be impacted by having a strong new rival to compete with. Indeed, Verizon shares fell 2.6% on the merger news Tuesday, while AT&T stock stayed relatively flat, losing just 0.4%.
What to watch for: Whether either side tries to renegotiate the price and terms of the transaction. Considering that this deal was already years in the making, “it would be foolhardy not to get this thing done as soon as possible, with a bare minimum of complication,” Lemonides says. “Renegotiating would add uncertainty—it’s a risk that these companies should not take.”
Get The Best Financial Tips
Straight to your inbox
Subscribe to our mailing list and get interesting stuff and updates to your email inbox.
Thank you for subscribing.