Tie-up between T-Mobile and Sprint still not a done deal, analysts say

A tie-up between T-Mobile and Sprint may seem like a natural fit, but it’s still far from a done deal.

Speculation of a merger between the two U.S. wireless operators has continued to heat up in recent weeks, due to both the end of the quiet period following the incentive auction of 600 MHz airwaves and the likelihood of a lighter regulatory stance of Donald Trump’s administration compared to the Obama White House. The parent companies of both carriers made eyes at each other across the dance floor last week.

SoftBank spent more than $20 billion to acquire Sprint in 2012, and the company had hoped to acquire T-Mobile as well, merging the carriers to take on Verizon and AT&T. That effort was dropped when U.S. regulators indicated they were opposed to a merger, however.

But while both operators are clearly interested in joining forces to take on Verizon and AT&T, an alliance may not be as compelling now as it was a few years ago. T-Mobile has gained impressive momentum under CEO John Legere, and Sprint has begun to regain its footing financially and in terms of market share in recent quarters.

“We believe the necessity of doing a deal is less than appreciated in the market, and considering what we believe are very different valuation/ownership views at (Sprint parent) SoftBank and (T-Mobile parent) Deutsche Telekom, we believe this could prevent a Sprint/T-Mobile deal from getting done,” Cowen and Company analysts wrote in a research note. “And if they are able to come to terms it likely requires Sprint to pay a meaningful premium to where T-Mobile trades now, which we think could be determinantal to Sprint stock or would actually require that T-Mobile buy Sprint, which we think could be detrimental to T-Mobile stock.”

Indeed, the financial math may prove impossible to overcome for the two carriers. Sprint holds an extremely valuable portfolio of high-band spectrum, but T-Mobile recently invested heavily in 600 MHz airwaves during the FCC’s incentive auction and plans to use that spectrum to deploy 5G services. Meanwhile, T-Mobile has become a lucrative business and may simply prove too pricey for SoftBank to acquire.

And there’s still the question of whether federal regulators would approve of a deal that significantly consolidates the U.S. wireless market.

“The combination of recent press reports suggesting SoftBank may be starting informal deal discussions with Deutsche Telekom and the company’s own acknowledgment that a deal with T-Mobile is the preferred option for Sprint suggests building momentum for the start of a possible transaction,” Amir Rozwadowski of Barclays wrote in a note to investors. “Ultimately, the deal’s prospects will likely boil down to  whether or not the respective ownership parties (i.e. Deutsche Telekom and SoftBank) can close what seems to be a wide and complicated bid-ask spread between the two…. To say there are a lot of factors which need to be taken into account when structuring a potential transaction is an understatement.”