Mixed Signals: How Will A T-Mobile-Sprint Merger Play Out For Investors?

The T-Mobile US Inc. TMUS merger with Sprint Corp. S approved late last week by the Justice Department will certainly affect the mobile phone landscape if it ultimately goes through — but the signal is still a bit garbled on how it will ultimately play out for investors.

Sell-side analysts agreed Monday the merger will affect a range of businesses, from the soon-to-be four big mobile players to fiber and tower companies and the pay TV industry — though an overriding theme has yet to emerge.

What Happened

The Justice Department approved a merger of T-Mobile and Sprint, the nation’s No. 3 and No. 4 wireless providers, respectively, behind Verizon Communications Inc. VZ and AT&T Inc. T.

But approval came only after T-Mobile and Sprint agreed to sell some assets to satellite TV company Dish Network Corp DISH to create a new wireless carrier, meaning there will continue to be four large options for wireless customers.

A lawsuit filed by 13 state attorneys general seeking to block the merger remains. The consent decree worked out by the two companies and the DOJ, also needs court approval.

What It Means For The Players

The main player, the new T-Mobile-Sprint, will use the combination to close the gap with the top two industry players.

The newly merged Sprint and T-Mobile will have more than 90 million customers, making the combined company immediately competitive with Verizon and AT&T, which each have about 100 million. The bigger impact is likely to be felt by Verizon and AT&T.

Wells Fargo analyst Jennifer Fritzsche said it's not just the newly merged competitor, but the new entrant, Dish, that could hurt the two big players the most.

"Longer term, a new competitor is an incremental negative for T and VZ given DISH’s disruptive nature," the analyst said in a note.

Still, it will take time for Dish to scale, and early work on 5G by Verizon and AT&T have given them a good head start.

Credit Suisse analyst Douglas Mitchelson sees "virtually no impact from DISH the next few years," on Verizon and AT&T because of the anticipated long network buildout period.

"Longer-term, while DISH might be in a position to deflate wireless pricing, AT&T and Verizon should still have superior coverage, network density (important for latency and capacity), backhaul, scale, and quality of service," the analyst said in a note.

For now, it's hard to foresee the ultimate impact, Morgan Stanley's Simon Flannery said in a note.

"In terms of implications of the settlement for the broader universe, much depends on how successful a competitor DISH could turn out to be."

Dish

Dish will be required to build a 5G cellphone network after buying the prepaid brand& Boost Mobile, from Sprint, and will receive access to T-Mobile’s network for seven years, giving Dish a jumpstart with a partial network ready to be used by customers.

The long period needed to build out the full network is an issue for Dish, though, said Mitchelson.

"We would certainly expect most investors to be skeptical that DISH would be a meaningful facilities-based mobile network operator for at least the next few years."

Tower And Fiber

Analysts view the deal as mixed for tower companies. The good news is that the deal will require Dish to lease a lot of towers, mitigating the fact that T-Mobile will abandon several thousand of them.

The proposed deal is good for fiber companies, as Dish is likely to be aggressive in leasing fiber to build out the backhaul part of its network, according to sell-side analysts.

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