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Morningstar | Sprint and T-Mobile Win Critical FCC Support for Merger; Odds of Approval Edge Higher. See Updated Analyst Note from 20 May 2019

T-Mobile and Sprint have formally made a series of commitments to the Federal Communications Commission, winning FCC Chairman Ajit Pai’s support and likely assuring the FCC will sign off on the firms’ planned merger. Justice Department approval, which is rooted in antitrust law rather than a public interest standard, remains the biggest hurdle for the deal. The odds of merger approval have certainly increased with this development but remain far from 100%, in our view. We are moving the odds of approval behind our fair value estimates to 75% from 50%, lifting our T-Mobile and Sprint fair value estimates to $80.50 and $7.20, respectively.

With the jump in Sprint shares on the announcement, the market-implied probability of the deal closing has increased to around 95% from about 80% last week. We believe this percentage is too high. With Sprint now trading within 10% of what we think it is worth should the deal close, we believe the stock is particularly unattractive. The jump in T-Mobile shares puts that stock within 5% of what we think it would be worth following a successful Sprint merger, but we still see far less downside for the stock if the deal ultimately fails. On a standalone basis, we believe T-Mobile and Sprint are worth $70 and $3 per share, respectively, with far more uncertainty around Sprint’s future.

We don’t believe the proposed commitments radically alter the long-term competitive dynamics within the wireless industry that would emerge if the deal goes forward. T-Mobile and Sprint have agreed to meet several network coverage targets for 5G technology, committing to use both low- and mid-band spectrum to deliver certain minimum data speeds and provide in-home broadband services. We believe these network commitments are not far off from what the firm would hope to do absent merger concessions. The firms have also reiterated their commitment to hold prices at current levels for three years, but we suspect the short time period won’t sway regulators at the Justice Department.

More radically, the firms have agreed to divest Sprint’s Boost brand to a “credible” buyer and supply the buyer with better wholesale terms that either firm currently provides. While this step could facilitate additional wireless competition, the history of non-facilities based wireless competitors in the U.S. is mixed, at best. Building a brand around a largely undifferentiated service offering is challenging, especially when competing against the carriers’ own sub-brands (Leap at AT&T; Metro and Virgin at T-Mobile).

Critically, in our view, the firms stopped short of committing to divest actual network assets or spectrum licenses. We suspect the Justice Department would favor such divestments, potentially facilitating the cable companies’ entrance into the wireless business as converged, facilities-based competitors that can truly take on AT&T and Verizon over the long run. Notably, T-Mobile and Sprint also agreed to honor Sprint’s wholesale and network sharing agreement with Altice USA, though this firm is relatively small among U.S. cable companies and this commitment didn’t come with penalties should T-Mobile fail to extend the relationship beyond its current scope.