Would a Sprint and T-Mobile Merger Be "Logical"?

The wireless consolidation is still not over. Among the latest acquisitions is Verizon's  agreement to buyout longtime partner Vodafone's 45% share in Verizon Wireless. Just before this we saw both Sprint  and T-Mobile  complete major consolidations with other telecom operators. While Sprint joined forces with Japanese wireless operator Softbank and acquired Clearwire, T-Mobile closed its agreement with pay-as-you-go carrier MetroPCS. The third and fourth-largest national carriers of the US are trying to contest the two largest mobile operators, Verizon and AT&T . But this is not all.

T-Mobile's CFO Braxton Carter says that he sees more wireless consolidations in the future. In fact, he went on to saying that a merger between T-Mobile and Sprint is quite "logical" as it would strengthen competition in the US wireless industry. However, when asked if the two national operators were in consolidation talks, the fourth-largest carrier declined to comment, which led to speculation regarding the possible merger. Sprint officials also kept quiet on this matter.

Carter told Reuters that he sees this as the most "logical ultimate consolidation." This would be in the interest of the industry to shake the virtual duopoly of Verizon and the AT&T by introducing a stronger third carrier. The question that arises is, will the Federal Communications Commission and the Department of Justice allow such a merger deal to happen?

Is the "logical ultimate consolidation" a tough proposal?
It's now been approximately two years that the FCC and the DOJ blocked the $39 billion T-Mobile's acquisition proposal made by the second-largest US carrier AT&T. The idea was to prevent any possibility of a monopoly and promote competition. In fact, the Kansas carrier was on the opposition side. Sprint's Chief Executive Dan Hesse expressed his concern that if AT&T acquired T-Mobile, it would further increase the Dallas carrier's market share and kill wireless competition.

Although T-Mobile and Sprint have recently merged with other wireless entities, the big two are still way ahead. Carter agrees that further consolidation, particularly among national carriers, would be "tough" as the FCC isn't fond of big mergers; quite evident from the fate of the AT&T-T-Mobile deal.

Also, the T-Mobile and Sprint merger could prove to be a risky step for both companies. Both have different networks and making the two networks compatible with one another is an expensive task. Sprint runs on CDMA while T-Mobile runs on GSM. Years back Sprint made a similar move when it acquired Nextel.

However, Carter believes that consolidation between the smaller national carriers would make a bigger No. 3 US carrier that will be able to effectively compete with the wireless biggies. Together Verizon and AT&T enjoy over twice the subscriber strength of Sprint and T-Mobile together. AT&T has 107 million subscribers, Verizon has 100 million, Sprint reported 53 million, while T-Mobile posted a subscriber base of 44 million at the end of second quarter of 2013. So, if Sprint and T-Mobile combine, the consolidated entity would be able to contest the bigger rivals more aggressively.

Both Sprint and T-Mobile are already posing challenges to its bigger rival.

Greater competition
After its merger with MetroPCS, T-Mobile has been fiercely competing with AT&T by introducing more attractive plans. In fact AT&T's Chief Executive Stephenson admits that the carrier is experiencing competition from T-Mobile's offering in the price sensitive markets.

Both Sprint and T-Mobile were suffering from market share loss to the big two until they combined forces with other wireless operators. Now things have started taking a turn in favor of the smaller players. T-Mobile's early smartphone upgrade program Jump, particularly designed for the iPhone is doing extremely well. Simultaneously, Sprint is also focusing on aggressive pricing strategy which will be driven by its 4G LTE rollout.

The No. 3 and No. 4 carriers are offering really good deals for the iPhone users as both are really keen on catching up with AT&T and Verizon. The upgrade program typically allows the smartphone user to purchase the device and pay in monthly installments. The user can then upgrade the handset once in a year, (or six months as in case of T-Mobile) by exchanging the existing handset for the new one. Although the bigger carriers are also providing upgrade programs, they are not as attractive as Sprint's or T-Mobile's.

T-Mobile's Jump plan costs $10 a month and applies to all its plans ranging in $50 to $70 a month. On the other hand, Sprint's One Up upgrade program comes for free. But there is a condition that the subscribers should be signed to its unlimited plan or the All-in plan. The carrier has given a $15 discount on the unlimited plan which brings down the monthly cost to a competitive $65.

So we see that a number of steps are being taken by both T-Mobile and Sprint to regain market share and challenge AT&T and Verizon. So how attractive are these stocks?

Are Sprint and T-Mobile worth considering?
As far as Sprint is concerned, I would suggest only long term investors to take a look at it. Softbank's Chief Executive Masayoshi Son said that it would take about two year to turnaround Sprint's fortune. The carrier's price-to-sales ratio is just 0.70 compared to T-Mobile's 0.93, AT&T's 1.41 and Verizon's 1.13. This would be an attractive proposition for patient investors to consider the growth stock that suffered a setback post the Nextel acquisition.

T-Mobile also looks like an interesting stock which could brighten investors' portfolio. The company is well positioned to attract customers from rival players and increase its subscriber base. After several quarters of lackluster growth, the carrier added 688,000 postpaid subscribers in the second quarter of 2013, thanks to its attractive low priced plans and unlimited data usage service. The company's revenue also increased 33.16% in Q2 2013 compared to the previous quarter. However, average revenue per user, or ARPU, fell 0.9%, but I consider that the second half of the year should give better results to the carrier as its early upgrade program is expected to boost the metric. The fourth-largest carrier is aggressively marketing, building its network and offering wide ranges of smartphones to cater to the subscriber needs and threaten larger players.

The Foolish bottom line
Individually contesting the two majors would be a tough game. So the question of consolidation arises to create a more viable contender for these telecom giants. Carter is very optimistic about the potential of this merger and feels the FCC and other regulatory bodies won't block the deal, if and when it happens. However, such a step should be taken considering its pros and cons. I am sure Sprint would not like history to repeat itself with the network compatibility issue. It would be interesting to see how things proceed for Carter's "logical combination" proposal. Will it mature or disappear in thin air once again remains to be seen.

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The article Would a Sprint and T-Mobile Merger Be "Logical"? originally appeared on Fool.com.

Rajesh Marwah has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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