FINANCE II

Explain the Sprint and T-

Mobile Meger

Sprint Corporation, the 4th largest American telecom carrier, was one of the pioneers of providing
unlimited data and was widely considered to be the most affordable major carrier. T- Mobile, which is
largely owned by Deutsche Telekom and was the 3rd largest, was known for affordability, coverage and
customer satisfaction. Multiple attempts for T-Mobile and Sprint to merge only came to fruition on April
29, 2018, albeit with antitrust violation concerns. Regulatory hurdles were overcome to finalize the
merger on April 1st, 2020 with synergies valued at an NPV of 43 billion dollars Factors like the newly
combined wide-band networks for increased coverage contributed to this. There was also a reduction in
redundant cell sites and marketing costs, significant increases in free cash flow, an expansion of their
customer base and strong flexible capital with a fully funded business plan. The friendly deal was an all
stock merger, and public owners of Sprint received 1 share of the new company per 9.75 old shares while
Softbank, the majority owner of old sprint, only received 1 share for every 11.3 shares due to demands from
Deutsche Telekom to accommodate for changes in Sprint’s share over the course of the merger. The
sprint brand was absorbed in the new T-Mobile, with Sprint store and employees transitioning over to the
new brand.
To be allowed to go through with the deal, the new company had to sell its prepaid businesses, Virgin
and Boost Mobile to Dish, with the Virgin Mobile brand going back to the Virgin Group. Dish would also
be able to use the merged Sprint - T-Mobile network for 7 years in hopes that Dish would replace Sprint
as the 4th carrier in the future. Thanks to the merger, customers received faster speeds, broader coverage
and better signals compared to competitors, At&t and Verizon. As part of the agreement with regulators,
prices for consumers remain frozen for three years from the date of the merger. During the month of the
Approval, T-Mobile and Sprint shares soared 15 and 110% respectively. Shares of the combined company
rebounded from the market crash in March 2020 and have risen almost 27% since the peaks prior to the
crash.
We think that the merger was indeed a good idea on many fronts. First off, it has created a solid player
in the telephone market that can deploy a vast 5G network and attain a significant cost advantage as well
as benefit from the newly combined network of over 100 million customers. The merger generated
synergies of over $43 billion in value for the shareholders through the combination of the network and
potential for expand the 5G technology. We estimated an inherent value of Sprint's stock price of $4.88
against a market price of $6.5 at the time of the deal's initiation by using P/E multiple and EPS as of the
end of the fiscal year 2018. We, therefore, see an accurate valuation of Sprint's equity at $19.5 billion
against the $26 billion offered for closing the deal. We believe that T-Mobile overpaid for Sprint's equity in
this instance.
The merger was not without some risks. U.S anti-trust laws could have prevented the mega-merger
from happening and there were significant concerns from regulators, advocacy groups, and other
competitors on this deal's fairness. Only three network operators would remain in the U.S market, and
there were concerns that oligopolistic practices could have led to higher prices for the consumers.
Competition concerns led a dozen state attorney Generals to sue to block the merger. Judges ended up
ruling in favour of the merger with conditions including a 3 year price freeze, prepaid business sale and
allowing Dish to use the new combined network. There was also some reluctance from the board of
Softbank, a major shareholder of Sprint, to accept T-Mobile's offer, which caused the first deal to fail in
2017.
However, even with all these various hurdles, the merger pushed through. It will be worth reviewing
the deal’s long-term effects on consumers, it’s competition, and on the overall market.
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