EUR 850.00 For Business Accounts Only

Morningstar | We're Cutting Our Sprint FVE on a Weaker Outlook for the Stand-Alone Business

We’re lowering our Sprint fair value estimate to $5.75 from $6.40, primarily reflecting a more negative view of the firm’s prospects as a stand-alone firm, though we maintain our belief that the T-Mobile merger has a 50% chance of winning regulatory approval. We continue to believe Sprint lacks an economic moat, but given our diminished view of the stand-alone firm, we have lowered our moat trend rating to negative from stable. Absent the T-Mobile merger, we expect Sprint’s competitive disadvantages will grow as it struggles to keep pace with its three larger rivals. At current prices, we believe Sprint shareholders face more downside risk than upside potential. We would rather own T-Mobile at current share prices.

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 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.

Network investment has been cut to the bone over the past two years, and Sprint passed on an important low-frequency spectrum auction in 2017. These decisions, made to generate positive cash flow, only exacerbate the firm’s long-term competitive challenges, in our view. Sprint’s greatest asset is its trove of high-frequency spectrum, but putting this spectrum to effective use requires a relatively dense network, which requires heavy investment.

In short, we believe Sprint’s best path forward is to merge with T-Mobile. We believe a combined Sprint and T-Mobile would hold a compelling set of assets. The firm’s spectrum portfolio, assuming regulators don’t require significant divestitures, would be unmatched in the industry, including large holdings across all major bands, excluding millimeter wave, which has yet to be proved widely useful. This position should enable the new firm to deliver broad coverage using the T-Mobile network while deploying Sprint spectrum to add deep capacity where needed. With the scale the combined firm would enjoy, it should produce ample cash flow to invest in the network while also reducing leverage, providing the needed flexibility to adapt to future industry challenges.

Absent the T-Mobile merger, we believe the firm needs to find another merger partner, such as a cable company, or radically restructure its finances. The prospects for finding another partner don’t look great at this stage, especially considering that a failed T-Mobile deal would weaken Sprint’s negotiating position further. We believe Softbank could step in if Sprint’s business deteriorates from here, preserving value for itself and minority owners. An infusion of equity capital would likely result in significant dilution of existing shareholders, but this outcome would certainly be better than bankruptcy.