T-Mobile & Sprint Win FCC Approval for Long-Awaited Merger

The $26.5 billion megamerger between telecom giants — T-Mobile US, Inc. TMUS and Sprint Corporation S — has received approval from the Federal Communications Commission (“FCC”) in a vote split along party lines. However, the transaction still faces certain roadblocks as a state attorney general team seeks to block the deal citing anti-competitive trade practices that are likely to affect customers and escalate costs.

The third and fourth largest U.S. wireless carriers, backed by Deutsche Telekom AG and SoftBank Group Corp., respectively, have refuted such claims and emphasized that the merger would enable them to better compete with major players like AT&T Inc. T and Verizon Communications Inc. VZ.  In addition, the companies expect that the operational synergies from the combined entity would facilitate faster and seamless deployment of 5G technology across the country, thereby benefiting the larger population.

The Merger

In April 2018, T-Mobile and Sprint had inked an agreement to merge in an all-stock game-changing transaction to accelerate development of faster 5G wireless networks. The New T-Mobile would have approximately 127 million customers with a strong closing balance sheet and a fully funded business plan, coupled with a strong foundation of secured investment grade debt at close. The combined entity will be a force to reckon with in the wireless, video and broadband industries, boasting a network capacity for 5G network deployment.

However, the FCC initially offered resistance on the grounds of stiff competition and monopolistic trade practices. It argued that the merger will substantially lower the competition in wireless, and push up prices of mobile services considerably. The quality and quantity of wireless services were also expected to decline with innovation possibly facing a setback.

FCC Green Signal

Media reports cited that the deal has now received majority support from the FCC, including three Republican commissioners, except Jessica Rosenworcel. However, the much-awaited merger is facing a court challenge from a group of 16 states, including California and New York, on antitrust concerns. The hearing is scheduled to commence on Dec 9.

Notably, the companies had received the Justice Department’s approval for the deal in July as DISH Network Corp. agreed to pay $5 billion for their wireless assets. Dish also received a seven-year agreement allowing it to sell T-Mobile wireless service under its brand. The terms also include a three-year service agreement from T-Mobile to provide operational support as prepaid customers move to Dish.

Moving Forward

Markedly, the combination of the two networks would help to fill coverage gaps and also provide more 5G connectivity, leading the company to devote more resources to build new 5G infrastructure. According to the reports, the merged company would roll out 5G technology to 97% of Americans, including 85% of rural locales. But the state litigators are concerned about competition in the greater telecom space, even as officials from each of the companies said the deal will keep a cap on prices for three years. Jobs are another major focus as the deal will likely harm independent wireless dealers, leading to a substantial loss of retail jobs and lower pay for workers.

T-Mobile and Sprint have long-term earnings growth expectation of 12.4% and 19.6% respectively. T-Mobile’s shares have gained 25.8% compared with the industry’s growth of 17.6% year to date. Sprint’s shares have returned 10.7% in the same period.

While T-Mobile currently carries a Zacks Rank #2 (Buy), Sprint has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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