There’s been a lot of talk about Sprint Corp (NYSE:S) buying T-Mobile US Inc (NASDAQ:TMUS) over the last few weeks. These talks sparked when Sprint owner Softbank Corp. (Japan)’s (OTCMKTS:SFTBY) CEO Masayoshi Son cozied up to Donald Trump and announced plans for a $50 billion U.S. investment and pledged to create 50,000 jobs. Immediately, everyone assumed T-Mobile was on Son’s radar, and he was working a bargain of sorts with Trump.
While BNL Finance has gone on the record saying this deal will never happen, and has identified other areas of interest for Son, we also believe the merger would be great news for AT&T Inc (NYSE:T) and Verizon Communications Inc (NYSE:VZ).
Granted, most believe if Sprint and T-Mobile merge, it immediately destroys the duopoly that AT&T and Verizon have created. However, that’s not entirely accurate.
While the combination would put Sprint and TMUS much closer in terms of subscribers and spectrum assets, it would also eliminate the vicious price war that has since caused AT&T and Verizon to follow.
Remember, Sprint and T-Mobile have pretty much gone tit for tat to see who can give more away. In retrospect, the U.S. wireless space is fully penetrated by number of users. The only growth left is data consumption, which grew 55% last year and is expected to grow at a compound annualized rate over 50% through 2020, worldwide.
Furthermore, mobile video is the fastest growing method of data consumption, growing 62% through 2020. Fact is wireless companies could very well leave data plan prices unchanged, and watch big profits roll in as consumption rises. Ultimately, that bodes well for VZ, TMUS, S, and AT&T stock owners.
However, TMUS and Sprint insist on battling to see who can reduce data prices and increase data allowances faster, effectively destroying the market opportunity. That’s one big reason Verizon and AT&T stock owners should be cheering a Sprint T-Mobile merger, to put an end to this madness, or at least slow the bleeding.
T-Mobile Sprint merger bodes well for Verizon & AT&T stock owners
With that said, TMUS and Sprint may not care if they destroy every business opportunity available, but AT&T and Verizon are legitimate businesses who do care. While Wall Street may love TMUS and Sprint stock, fact is you put these two together it is very possible they self-destruct.
Collectively, Sprint and T-Mobile have over $65 billion in balance sheet debt. Then you add in another $20 billion in off balance sheet debt for Sprint, and the $50 billion that Softbank and Sprint would have to pay for T-Mobile. You arrive at a company that is highly, extremely leveraged.
While TMUS has managed to produce a near 4% net profit margin over the last 12-months, Sprint is still quite a ways from consistent net profits. Sure, it is creating operating profits, but the interest from debt and obligations eat away whatever the company can earn.
If you add more debt to the mix with a T-Mobile acquisition coupled with higher interest rates it would create a company with very little flexibility and a likely competitive disadvantage for many years to come.
With that said, Sprint stock bulls point out that AT&T and Verizon have more debt as standalone companies than Sprint and T-Mobile would have as a pair. However, Verizon and AT&T also have an operating margin of (roughly) 20%. Furthermore, Verizon is 75% larger and AT&T more than double the size of a combined Sprint and T-Mobile.
All things considered, the Sprint T-Mobile merger is quite unlikely. However, just in case it does happen, Verizon and AT&T stock owners should not worry. It’s probably best.