EUR 850.00 For Business Accounts Only

Morningstar | Sprint Continues to Struggle as a Decision on T-Mobile Nears

We believe Sprint faces a binary outcome that depends on its proposed merger with T-Mobile. If U.S. regulators sign off on the merger, we expect the combined firm will prosper, creating significant value for Sprint shareholders. On the other hand, if the deal is killed, we believe a restructuring of some sort, such as a bankruptcy filing or highly dilutive equity infusion, is well within the realm of possibilities. Sprint simply doesn’t have the scale or financial resources to overcome the disadvantages it faces, in our view. Based on our estimate of Sprint’s stand-alone fair value, we believe shareholders face more downside risk than upside potential.Sprint’s challenges as a stand-alone carrier are threefold, in our view: Its network remains inferior to rivals’, its brand reputation is weak after a decade of poor performance, and it lacks the financial resources to fully capitalize on the assets at its disposal. Sprint consistently ranks at the bottom of most metro-area network tests, including those of RootMetrics and PC Magazine, in terms of average data download speeds and reliability. In addition, Sprint covers far less geographic territory than its three national rivals. This network position is the result of inconsistent network investment over the years, coupled with a spectrum position better suited to delivering deep capacity than broad coverage.While Sprint’s network meets the expectations of fewer customers than its competitors’, the firm has used aggressive promotions to attract new subscribers. This effort has stemmed net customer losses but also produced the least-loyal customer base among the four major carriers, by a wide margin, and done little to improve free cash flow. Sprint is ramping up capital spending this fiscal year after two years of austerity, but we suspect the firm will still fall well short of the competition.The T-Mobile merger would likely eliminate Sprint’s shortcoming quickly, as the combined firm would lean most heavily on T-Mobile’s network, deploying Sprint’s spectrum assets to augment capacity. Most critically, the new T-Mobile should have the scale and financial resources to compete against Verizon and AT&T.