A Sprint/T-Mobile Deal Still Faces Big Hurdles, Especially for Sprint

For an M&A deal that could yield big synergies but also faces big regulatory risks, any decision on whether or not to push ahead with merger talks comes down to a risk/reward calculation. Are the benefits of a deal strong enough, and the odds of it being approved high enough, to offset all the costs — termination fees, distracted management, missed opportunities for other deals — associated with a potential rejection?

Under the Trump Administration, T-Mobile US Inc. (TMUS) and Sprint Corp. (S) apparently feel the answer to that question, as it relates to a tie-up between the #3 and #4 U.S. mobile carriers, is “yes.” But T-Mobile’s risk/reward calculations are probably a lot different than Sprint’s, given its much healthier financial and competitive position, and just because the risk of a rejection has dropped doesn’t mean it’s no longer significant.

On Tuesday morning, September 19, CNBC and Reuters both reported that T-Mobile and Sprint have resumed talks and were discussing an all-stock deal that (unsurprisingly) would give T-Mobile a majority stake in the combined company. Sources cautioned that any deal is still weeks away and isn’t guaranteed to happen. CNBC added an exchange ratio for shares hasn’t been agreed to yet.

Sprint shares rose 6.8% to $8.20 following the report, but remain down 3% on the year (compares with a 12% gain for the S&P 500) due to disappointing earnings reports and worries about aggressive promotional activity. T-Mobile shares rose 5.9% to $65.42, and are now up 14% on the year.

Reports about T-Mobile and Sprint being open to a deal have been around since February, and the companies are believed to have started talks in April, after an FCC spectrum auction that prevented discussions ended. Talks were reportedly halted in May as Sprint entered into a 2-month exclusive negotiating window with Comcast Corp. (CMCSA) and Charter Communications Inc. (CHTR) about a reseller deal that would involve the cable giants taking stakes in Sprint. While reporting on those talks in June, The Wall Street Journal reported Sprint and T-Mobile “remained far part” in discussions.

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With Sprint’s cable talks having apparently gone nowhere, it now looks like T-Mobile talks are underway again. But it’s unclear just how serious the talks have gotten, and under what terms T-Mobile, for whom a deal with Sprint is far from necessary, would be willing to sign on the dotted line.