Less than six months after the last round of merger talks between Sprint Corp (NYSE: S) and T-Mobile US Inc ( TMUS) reportedly came to an end, both stocks soared after the Wall Street Journal reported Sprint and T-Mobile have resumed negotiations.
Sprint stock delivered a particularly large bounce, surging more than 17 percent to above $6 per share, but Sprint investors know not to get their hopes up too much when it comes to another round of merger rumors.
According to sources familiar with the matter, T-Mobile and Sprint are currently in the preliminary stages of a new round of negotiations that could result in the third- and fourth-largest U.S. wireless carriers joining forces to take on Verizon Communications ( VZ) and AT&T Inc. ( T).
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The situation is more complicated that the average merger thanks to Deutsche Telekom’s 63 percent ownership stake in T-Mobile and Softbank’s 85 percent ownership of Sprint. Back in September, SoftBank reportedly said it was willing to accept an all-stock merger deal at or near Sprints $34 billion market cap at the time. Deutsche Telekom had previously said it believes Sprint’s true value was well below market price.
To complicate matters further, it’s unclear just how much regulatory push-back the potential horizontal merger would get. The Department of Justice is currently challenging the proposed AT&T buyout of Time Warner ( TWX) on antitrust grounds. The Time Warner buyout is potentially a much larger deal, but it is also a vertical merger of two non-competing businesses.
Given the current valuations of Sprint and T-Mobile and the huge spike in share prices on Tuesday, there may be little upside remaining in the stocks even if a deal is announced.
“Based on a $30 billion synergy estimate, we believe that there could be downside to both stocks in a merger announcement,” Bank of America analyst David Barden said during the previous round of merger talks between Sprint and T-Mobile.
For Sprint investors, Morningstar analyst Allan Nichols says a merger is the only way either company can hope to compete with Verizon and AT&T.
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“We are skeptical that either Sprint or T-Mobile can overtake either Verizon or AT&T without being allowed to consolidate,” Nichols says.
Prior to Tuesday’s big move, Morningstar had an “undervalued” rating and $5.25 fair value estimate for Sprint. Bank of America has an “underperform” rating and $3 target for Sprint stock.
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Sprint Corp (S), T-Mobile US Inc (TMUS) Still Have Major Hurdles to Clear originally appeared on usnews.com
