Investors expect any T-Mobile/Sprint deal price haircut to be small

(This Feb 11 story corrects reference to value of Sprint’s spectrum in paragraph 11)

(Reuters) - T-Mobile US Inc may be limited in its ability to trim the price of its $40 billion acquisition of Sprint Corp after it overcame regulatory obstacles to completing the deal, investors and analysts said on Tuesday.

The merger between the third and fourth largest U.S. wireless carriers was agreed in April 2018, but was prevented from closing by U.S. states challenging it in court on antitrust grounds. A U.S. federal judge gave the companies the green light Tuesday to complete the deal.

Before it is completed, T-Mobile’s German parent, Deutsche Telekom AG, plans to ask Sprint’s majority owner, Japan’s SoftBank Group, to agree to a lower price, arguing that Sprint’s fortunes have deteriorated following their agreement two years ago, sources told Reuters on Monday.

However, investors are pricing in only a modest potential haircut. Sprint shares were trading at around $8.3 on Tuesday, a 14% discount to the $9.6 per share price that the all-stock deal with T-Mobile assigns Sprint.

The market is assuming an approximately 9% cut to the deal price, Cowen analysts wrote in a research note on Monday after the companies’ shares soared on news that the merger could go ahead.

T-Mobile has plenty of arguments it can deploy in a renegotiation with Sprint. The latter’s market share in subscribing phone customers is down from 12.4% at the start of 2018 to 11.8% in the third quarter of 2019, according to Cowen analysts, as it shed 400,000 customers. Meanwhile, its debt pile rose from $33 billion to $34.1 billion.

SoftBank’s prospects have also worsened, making it harder for it to walk away from a deal. The Japanese conglomerate is struggling to raise money from investors for its second $100 billion Vision Fund, as high-profile bets on start-ups such as WeWork backfired.

Nevertheless, T-Mobile will likely be mindful about jeopardizing the deal with Sprint, because it needs the merger to take on bigger rivals Verizon Communications and AT&T in the race for the development of next-generation wireless 5G technology, analysts said.

“The only credible fallback is if T-Mobile says they’re willing to walk away, and I don’t think anyone would take them seriously,” said Craig Moffett, a telecom analyst at MoffettNathanson.

The merger would form a wireless giant with 126 million customers and help T-Mobile in the race for 5G by utilizing Sprint’s valuable spectrum. It would also allow T-Mobile to save on costs by eliminating overlapping infrastructure.

Despite the decline in its business, the valuation of Sprint’s 2.5 GHz spectrum, a prime band for 5G deployment, has doubled to $25 billion from 2016 to 2019, analysts at JPMorgan estimate. Both Verizon and T-Mobile are short on spectrum amid growing usage, according to New Street Research analysts.

“The primary leverage Sprint has is that T-Mobile’s growth and pending launch of 5G makes that spectrum depth very important to T-Mobile,” said Walt Piecyk, an analyst at LightShed Partners. “I would not be shocked if there was no change in price, because it’s been such a lengthy process, and the demand for spectrum continues to rise.”

T-Mobile said on Tuesday it expects the deal to close by April 1. Its executives have maintained on previous earnings calls the company hoped to close the deal in early 2020.

“A renegotiation won’t be easy, and by far the most important objective for both sides will be to close and move on to integrating,” said Jonathan Chaplin, analyst at New Street Research.

Reporting by Krystal Hu and Sheila Dang in New York; Editing by Greg Roumeliotis and Tom Brown