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Morningstar | T-Mobile and Sprint Win Key FCC Merger Support

T-Mobile’s turnaround has been remarkable. Following the merger with MetroPCS and the installation of the current management team five years ago, the firm quickly shifted from a market share loser to the industry’s dominant share taker. On its own, we expect T-Mobile will continue to narrow its scale disadvantage over the next couple of years, but we don’t yet have enough confidence that the firm can reach a point where it will earn sustainably strong return on capital. The Sprint acquisition promises to catapult the combined firm into an industry leader, creating significant value for all shareholders, in our view. We peg the odds of regulatory approval at 75%, but T-Mobile is positioned to reach a sustainable place in the industry even if the Sprint deal falls through.Over the past five years, T-Mobile has expanded its postpaid customer base 75% while the rest of the industry has posted virtually no growth. The firm’s relatively simple network architecture and spectrum holdings enabled it to upgrade to LTE technology efficiently and effectively while its innovative service offerings and marketing have attracted customers from other carriers. Growing scale and support from parent Deutsche Telekom have enabled T-Mobile to invest in new assets, which it has done smartly, in our view. The firm largely sat out the overhyped AWS-3 spectrum auction, for example, saving its resources to acquire low-frequency licenses. This move has enabled T-Mobile to expand geographic coverage, improving service and increasing its addressable market. Even with its enhanced scale, however, T-Mobile trails AT&T and Verizon by a wide margin: these rivals’ retail customer bases are roughly 40% and 65% larger, respectively. Given that T-Mobile generally prices its services at a discount to its larger rivals, it is set up to deliver inferior returns on capital. While T-Mobile’s margins and cash flows have improved dramatically as it has grown, it still doesn’t have the resources to fully control its fate, in our view. If the next evolution of wireless technology ultimately requires significantly higher investment in spectrum and equipment, T-Mobile may struggle to keep pace.