Why The New T-Mobile Should See Significant Margin Expansion
The merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) looks set to come to fruition, with the U.S. Department of Justice approving the deal in July 2019. In this analysis, we take a look at the potential cost structure of the combined entity using standalone historical data for T-Mobile and Sprint and arrive at projections using expected merger-related costs and synergies. We assume that the deal will close by the end of 2019, with 2020 being the first full year post the merger. Historical data for Sprint which has an FY ending March 31, has been calendarized for the purpose of this analysis.
View our interactive dashboard analysis A Look At The New T-Mobile’s Potential Cost Structure And Synergies
A Look At The Key Expense Drivers Of The New T-Mobile
Cost Of Services
- Consolidated costs of services would stand at close to $29 billion in 2018 for the combined company.
Cost Of Equipment Sales
- Consolidated costs of equipment sales would stand at close to $18.7 billion in 2018 for the combined company.
- SG&A would have stood at about $21 billion in 2018 for the combined company.
Sprint And T-Mobile’s Total Operating Expenses
What’s The Outlook For The New T-Mobile’s Key Operating Expenses, After Accounting For Merger Related Costs & Synergies?
Estimating Cost Synergies (Recurring)
- T-Mobile had indicated that it could see run-rate synergies of about $4 billion a year in networking costs, noting that integration would take 3 years.
- We assume that these savings will begin from 2023.
- T-Mobile projected Sales, Service & Marketing and Back office savings of $1+ billion each within 4 years, translating into run-rate savings of ~$2+ billion savings in SG&A costs.
- We expect these savings to begin from 2024.
Estimating The Costs Likely To Be Incurred To Achieve Synergies
- The merged entity will incur costs of about $10 billion relating to network integrations, likely spent over 3 years. (~$3.3 billion per year)
- SG&A related costs relating to the merger could come in at about $5 billion, spread over 4 years. (~$1.3 billion)
- This would imply $4.6 billion in total merger costs each year for 3 years, and $1.3 billion for year 4.
Outlook For Total Operating Expenses
- While we expect reported OpEx to rise for 3 years post-merger, we expect that synergies will kick in post that, reducing overall expenses.
What’s The Outlook For The New T-Mobile’s Operating Income?
- We expect Operating income to expand to about $12 billion by 2024, driven by revenue growth (about 2.5% a year) and cost synergies.
A Look At The Impact On Operating Margins
- We expect operating margins to improve to about 14% by 2024, as all the merger-related costs are expensed and the full extent of synergies is likely kick in.
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