Nationwide telecom Sprint (NYSE:S) has been on fire recently. The stock has gained 12% over the last three months and managed to hold steady in the last four weeks, handily beating the broader market in both cases.
That doesn’t necessarily mean Sprint is on a long-term roll. In fact, the stock is not likely to keep growing from this plateau. Sector rival T-Mobile USA (NASDAQ:TMUS) is merging with Sprint in a blockbuster deal, leaving little room for further improvement.
Steady as she goes
The stock-swap merger proposal involves giving current Sprint owners 0.10256 T-Mobile shares for each of their Sprint stubs. Flipping the math around, it takes 9.75 Sprint shares to generate a single T-Mobile share. The implied total enterprise value of this theoretical beast was approximately $146 billion on the day of the announcement. After some wild swings over the summer, both stocks are back to where they were six months ago, so not much has changed.
Sprint’s strong gains in recent months have nothing to do with stellar business results. It’s joined at the hip to T-Mobile, and the market strength of late comes from T-Mobile’s solid results and a rising probability that the merger will take place.
If you assume that T-Mobile’s buyout will close, there’s really no reason to buy or hold Sprint today. You’d be just as closely invested in Sprint by simply selling all your Sprint shares and reinvesting them directly in T-Mobile instead. And this is the best-case scenario here.
What if the merger fails?
Let’s say T-Mobile and Sprint fail to convince regulators that American consumers need a third huge telecom that can challenge Verizon Communications and AT&T on a level playing field. Or perhaps the Trump administration steps in to cancel the pending merger for whatever reason. The companies don’t expect their merger to close before the middle of 2019, so a lot can still happen.
In that case, both T-Mobile’s and Sprint’s shareholders will take a big haircut on the failure of their agreement. That’s a normal market reaction to any blocked acquisition. Even from that deep, dank discount, I’d hate to be a Sprint owner.
T-Mobile has been on a roll of its own in recent years. The self-proclaimed “uncarrier” is adding subscribers faster than any of its three major rivals. At the same time, Sprint must settle for celebrating small victories wherever it may find them. There’s no big, loud turnaround action going on here. T-Mobile will do all right without Sprint — but that’s not true for its intended buyout target.
I believe there’s nearly no hope that Sprint would be a viable business if this deal falls through. Therefore, I’d be much more comfortable holding T-Mobile shares in these uncertain times. With or without the final John Hancock on T-Mobile’s buyout papers, T-Mobile shares are at least as good of an investment as Sprint — and in the worst case scenario, a far better one.