Sprint Without T-Mobile? Investors Shudder to Think

(Bloomberg Opinion) -- It’s time for Sprint Corp.’s shareholders to come to terms with the fact that the wireless carrier may end up alone, and to get comfortable with what that might look like. The data show it won’t be pretty.

The U.S. Federal Communications Commission, one of the regulatory bodies scrutinizing Sprint’s sale to T-Mobile US Inc., paused its review last week after the companies delivered a dense packet of additional information making their case for the $59 billion deal. With the FCC already 122 days into a 180-day process, this isn’t a great sign. It’s also a reminder of just how high the stakes are for Sprint’s investors – including Masayoshi Son, the billionaire who controls the company through his SoftBank Group Corp. entity in Japan.

Despite occasional glimmers of hope in Sprint’s quarterly results, it remains a financially challenged business with a bruised brand. Let’s walk through the numbers.

Sprint’s net debt stands at $33 billion. During the latest 12-month period, that debt cost Sprint $2.4 billion in net interest expense, more than it was able to earn in operating income. 

The stock has been partially propped up by T-Mobile’s bid since last April. Should regulators block the merger, Sprint shares could plunge. They fell 4.7 percent last week. Sprint isn’t eligible for a break-up fee from T-Mobile either. 

Following a period of desperate promotional offers to attract subscribers, Sprint has been shifting customers to regular-priced plans, which recently helped boost revenue and margins. But it had to accept an unsurprising trade-off: 60,000 postpaid phone users (on a net basis) quit Sprint in the second half of 2018. Sprint simply hasn’t been able to shed its image of being a mediocre service provider, which means customers expect it to be cheaper than the competition – that’s still its main draw. 

To keep subscribers from leaving as their bills go up, the company needs to continue investing in network upgrades and marketing (taking T-Mobile’s cue) as it transitions to 5G service. While faster connections promised by new 5G networks will be more meaningful for new technologies like driverless cars than for mobile phones, it’s important that Sprint keeps pace. But Sprint’s free cash flow was negative $2.8 billion in the latest 12-month period. “The company is barely on track to generate enough Ebitda to cover network investment and interest expense,” analysts from New Street Research wrote in a January report.

The stock also isn’t as cheap as it appears. As I’ve noted in the past (with help from Craig Moffett, an analyst with MoffettNathanson LLC), Sprint’s financials are distorted by how it records its large number of leased phone handsets, something unique to Sprint. According to Moffett, adjusting for that factor shows Sprint’s true wireless-service Ebitda didn’t climb last quarter, but instead fell 3.8 percent.

After years of T-Mobile and Sprint trying to merge in the face of government opposition, these were the friendliest skies yet: a Republican-led FCC and Oval Office, and a Justice Department antitrust chief who hasn’t necessarily subscribed to the idea of needing to maintain four major competitors in the U.S. wireless market. The companies are also arguing that by joining forces they can more capably build a nationwide 5G network that will help the U.S. compete with China's own 5G efforts. However, Democratic members of Congress – including 2020 presidential hopefuls Elizabeth Warren and Amy Klobuchar – have called for the merger to be stopped on the grounds that it may hurt consumers, especially lower-income Americans.

It doesn’t help the optics that last Monday the New Yorker reported President Donald Trump had, in fact, tried to interfere in AT&T Inc.’s takeover of Time Warner, using his presidential powers for what would seem to be personal ax-grinding (CNN was one of the assets at stake). That’s relevant if, after railing against a merger of AT&T and Time Warner – which operate in different industries – the government then approves a merger of T-Mobile and Sprint, which are direct competitors. The T-Mobile executive team's frequent stays at the Trump International Hotel in Washington further taint the picture. Regulators also recently allowed a megadeal between Walt Disney Co. and 21st Century Fox Inc., orchestrated by Trump ally Rupert Murdoch, as the New Yorker noted. 

If the T-Mobile merger does get blocked, though, I just don’t see how Sprint can balance its critical investments with its need to improve its financial position.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

©2019 Bloomberg L.P.