For Sprint, M&A Talks With T-Mobile Outweigh 'Rocky Fundamentals,' Macquarie Says In Upgrade

The on-again, off-again merger talks between Sprint Corp S and T-Mobile Us Inc TMUS are back on again, according to The Wall Street Journal — which prompted Macquarie Capital to drop its bearish stance on the stock.

The Analyst

Macquarie's Amy Yong upgraded Sprint from Underperform to Neutral with a $6.25 price target.

The Thesis

SoftBank, Sprint's parent company, is reportedly back in talks with T-Mobile and its parent company Deutsche Telekom to merge. One of the biggest hurdles at this time is who would control the combined entity, given that SoftBank's ownership stake in Sprint stands at 84 percent and Deutsche Telekom owns 66 percent of T-Mobile.

SoftBank made it clear Sprint is a "key asset" to its portfolio and it would want a majority stake in the combined entity, Yong said in the upgrade note.

T-Mobile is the "highest-performing" asset for its German parent company, and a deconsolidation of its financials would be a potential negative, the analyst said. 

SoftBank has around $30 billion of liquidity that could be allocated for a deal, but "the window is narrowing," Yong said.

The Federal Communications Commission's upcoming mmWave auction could result in another quiet period and "preclude M&A discussions," she said. T-Mobile would secure spectrum in a merger with Sprint rather than participating in the auction, according to Macquarie. 

Sprint's "rocky fundamentals," including rising churn levels, take a backseat to any merger talks, which adds near-term support to the stock and lowers its downside risk, Yong said. 

Price Action

Sprint shares were up 1.67 percent after the open Thursday, while T-Mobile was down 0.14 percent. 

Related Links:

After Failed Merger Talks, Continuing The T-Mobile Vs. Sprint Pair Trade

To Do With Sprint, T-Mobile Now That A Merger's Off The Table

Photo by M.O. Stevens/Wikimedia.