The big hurdle that the long-proposed union of telecom majors T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) had to clear never involved the economics -- from a business perspective, combining them made sense. But from a consumer benefit and regulatory perspective, the question of going from four real wireless carriers to three might have been a step too far. Except maybe it's not after all.
In this segment from MarketFoolery, host Chris Hill and Fool.com contributor Dan Kline discuss the news that FCC Chairman Ajit Pai has given his blessing to the corporate marriage, why the recent data out of Sprint might have helped him justify that choice, and what this means for the two companies -- and their stocks.
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This video was recorded on May 20, 2019.
Chris Hill: Let's start with, I think this technically counts as breaking news, the chairman of the FCC saying that he is going to recommend to the agency the approval of the merger between T-Mobile and Sprint. This is a $26.5 billion merger. I know the FCC still needs to formally approve this, and so does the Justice Department, but Wall Street is acting like both those approvals have gone through.
Dan Kline: Well, because when you looked at this a few weeks ago, and I think we covered this on an Industry Focus not that long ago, they were putting it at 50-50. They weren't looking at the economics of it, they were basically very focused on, "But there's four, and it's going to go to three, and that's bad." And then Sprint came out and said, "Hey, look, we've been saying our numbers are pretty good." They came as close to saying they that they fudged the numbers as you can legally come. And what they were basically saying is, "Hey, we've added a million subscribers, but what we added is free lines." So they would say to you, "Hey, you're a Sprint customer. You think your dog wants a line? Could your iPad use a second line?" It was that level. If you went into a Sprint store, they were handing them out like gum.
Hill: This was not a Wells Fargo situation, where they weren't telling you?
Kline: No. They were telling you. And in general, it was a line you might want, like maybe for a kid or for a secondary device. But it wasn't a line you were going to purchase. So when T-Mobile says they've added a million postpaid customers, they're defining that as someone who signs up and joins and pays them money. Sprint was doing it in a more nefarious way. And they came out and said, "Hey, look, we're spending a lot of money." Even their regular customer acquisition was heavily discounted. So there was no real path to success for Sprint on its own. They probably could not afford the investment. I mean, obviously, they're owned by SoftBank, so technically, the parent company could put in all the money they wanted to. But there was every chance that if this deal wasn't allowed, that Sprint was going to be sold at a fire sale, and either T-Mobile was going to buy a lot of the assets anyway, or somebody like Comcast or Charter, who had already passed on operating Sprint as Sprint, would end up with just the customer base and the assets.
So all Sprint and T-Mobile really did -- And this kind of shows that Ajit Pai, the FCC chairman, was probably leaning toward this merger anyway -- all they did was committed to hitting 90% of the country with 5G within three years, which is something that they've talked about doing anyway. That's the logic of the merger, is to be the first to have a real 5G network all over the country. T-Mobile is banking on that because they have a television product they want you to buy.
Hill: So, when you see shares of T-Mobile up around 6%, 7% today, and shares of Sprint up north of 25%, that doesn't strike you as unreasonable? You think, "Yes, the approvals have to happen, but it's all over."
Kline: Obviously, pay attention to make Sprint shares don't go over the price that the deal is at, which does happen sometimes. But I am very in favor of T-Mobile. I'm bullish on T-Mobile even if the deal gets shot down. There is a bad history of mergers in this space. Sprint-Nextel is why Sprint is in this trouble.
Hill: [groans] Oh, God, I forgot about that one!
Kline: Beep beep! I'm referencing, for people who don't know, you used to be able to, on a Nextel phone, have a walkie talkie feature, and it made a ridiculously annoying noise. It worked very well in a factory.
Hill: I was going to say, very popular in factories and construction sites.
Kline: Yes, which is where I used them, so it was a good product for me. But in this case, you have a dynamic CEO in John Legere, and they have a plan. So whether the Sprint brand goes away, they haven't told you that. But eventually, this is a company that has tremendous customer loyalty because they're straight with you. If you walk into a T-Mobile and lay out your problem -- I had an issue, I wanted to upgrade my iPhone, and I was part of their old upgrade program. And they explained it to me clearly why I had to pay more money than I thought I did. And they were very nice about it. And I didn't leave angry. And that's very hard. There is no possibility AT&T or Verizon can do that.
Chris Hill has no position in any of the stocks mentioned. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool recommends CMCSA, Softbank Group, T-Mobile US, and VZ. The Motley Fool has a disclosure policy.