Sprint and T-Mobile Merger: The 12 points of filing by the FCC that signal approval of the merger and potential appreciation

Source: Wikipages.com

introduction

In a recently published article, I tried to provide the rationale and basis for the approval of a Sprint (NYSE: S) and T-Mobile (NASDAQ: TMUS) merger. The merger of these two companies into a single entity would represent an important long-term portfolio addition in the telecommunications sector. In addition, Sprint and T-Mobile are currently undervalued.

June 18^th, 2018, Sprint and T-Mobile have formally taken the initiative to file a written submission under Section 425 of the Securities and Exchange Act of 1934. This communication describes the transaction, the rationale for it. 39; public interest and various arguments in favor of the approval of the merger.

The 425 document contains 12 main arguments that are relevant to the merger and its approval. I've listed these points with the underlying points of each argument. If you are interested in knowing more about a specific point, I've included the page numbers in the 425 form corresponding to each chip.

The transaction

Here are the key points of the case:

1. Sprint will survive as a direct subsidiary of T-Mobile USA. (Page 3)
2. Subsidiaries SoftBank (OTCPK: SFTBY), Galaxy Holdings, Inc. (Galaxy) and Starburst, Inc. (Starburst), which combine 84% of Sprint's shares, will merge into a new indirect subsidiary of T-Mobile Huron Merger Sub (Huron) ). (Page 4)
3. All outstanding and issued shares of Sprint held by Galaxy and Starburst will be converted into 10256 T-Mobile shares. (Page 4)
4. Then, a second indirect subsidiary of T-Mobile, Superior Merger Sub (Superior) will merge with Sprint. (Page 5)
5. Each outstanding and issued share of Sprint not belonging to Galaxy and Starburst will be converted into .10256 T-Mobile shares. (Page5)
6. Deutsche Telekom (OTCQX: DTEGF) (DT) will hold 42% of all outstanding shares, and SoftBank will hold 27% of all outstanding shares. (Page 6)
7. New T-Mobile's head office will be located in Bellevue, Washington. There will be a second seat in Overland Park, Kansas. (Page 7)
8. SoftBank will give Deutsche Telekom the voting rights for its 27% stake, effectively giving TD control of New T-Mobile, even if DT does not hold 50% of the shares. (Page 6)
9. All Sprint FCC licenses will be transferred to the new T-Mobile. (Page 8)

Evaluation of the FCC Public Interest Assessment

The FCC is reviewing whether the above transaction could result in harm to the public, including, but not limited to, traditional antitrust principles.

There were interesting points and quotes in the document.

1. The FCC public interest standard is broader than the DOJ standard. (Page 9)
2. The FCC can only impose conditions to repair transaction-related damages, not pre-existing damages. (Page 10)
3. The FCC does not employ a "balancing act" or a sliding scale approach. (Page 11)
4. The FCC has already agreed that licenses can be freely transferred. (Page 10)

Build and deploy a world-leading network 5G

1. The cost savings from the merger amount to $ 43.6 billion in net present value by 2024. (Page 15)
2. New T-Mobile will invest $ 40 billion in the new network over the next three years, which is triple what it could have done alone. (Page 15)

Faster and cheaper deployment

1. On a standalone basis, neither S nor TMUS have enough spectrum or the right combination of spectrum to provide a robust 5G network nationwide. (Pages 17-31)
2. The merger will enable combined access to spectrum, cellular sites and additional radios to build an unparalleled 5G network, and will skip AT & T (NYSE: T) and Verizon (NYSE: VZ). (Page 16)
3. Compared to the autonomous networks of S and TMUS, the new T-Mobile network will provide 3 times the capacity, 4 to 6 times the average data rate (Mbps), 1.5 to 5.8 times the peak data rate and 1 , 6 to 2.8 times number of the US population that will have access to more than 100 Mbps. (Page 18)
4. The merger will boost US efforts to be the first to build a 5G network. (Pages 18, 69-70)
5. The combined spectrum assets of the company are complementary and cover all ranges to create a true 5G national network. (Page 31)
6. The new T-Mobile requires spectrum preservation for existing LTE features in order to continue operations. The merger would allow enough spectrum for existing LTEs and new services and 5G evolution. (Pages 36-37)
7. The new T-Mobile could convert about 50% or 20 million current S subscribers to New T-Mobile through live software upgrades. The PCS 1900 shared by both S and TMUS will seamlessly integrate the remaining S subscribers into the new T-Mobile network. (Pages 38-39)
8. The merger will lead VZ and T to accelerate and increase investments in their 5G networks. (Pages 47-50)

Huge benefits for consumers and offers

1. The economic analysis revealed that the merger would result in a 55% drop in the price of cellular data and a 120% increase in cellular data capacity for the new T-Mobile. (Pages 52-53)
2. The new T-Mobile will improve IoT deployments and be more competitive for VZ and T. (Page 56)
3. The new T-Mobile will improve medical and agricultural coverage in rural communities with 4K video and unlimited data. (Page 57)
4. Consumers will have a cheaper and better quality competitive option for home internet access. (Pages 57-63)
5. The new T-Mobile projects $ 60 / month, which includes 100Mbps internet access and a mobile service. (Page 64)
6. Rural areas will experience expansion and increased offerings for Internet service and mobile voice services. (Pages 64-69)

Enhanced business and video services

1. New T-Mobile will be able to go after corporate accounts competing with VZ and T when cross-selling bundled packages. (Pages 71-73)
2. The merger will allow a larger sales force to target corporate and government accounts. (Page 73)
3. The merger will allow the new company to offer fixed broadband, cloud computing, security and other complementary services to corporate and government accounts. (Pages 73-74)
4. The new network will extend and enhance IoT offers to businesses. (Pages 74-76)
5. The new network will allow the company to offer pay television and enhanced video services in direct competition with MVPDs (Comcast (NASDAQ: CMCSA), Charter (NASDAQ: CHTR) and others (Pages 76-79 ).

Create thousands of additional jobs

1. The economic analysis estimates that the New T-Mobile will add 24,960 jobs annually, or 124,800 from 2019 to 2023. (Pages 68, 80-84)
2. The new T-Mobile will add 11,000 new direct and internal jobs to the above-mentioned 124,800. (Page 82)

The merger will intensify, not harm the competition

1. Both Sprint and T-Mobile face significant challenges independently. Even with T-Mobile's and Sprint's Un-Carrier campaign, they are far behind Verizon and AT & T in terms of EBITDA, revenue, market share, borrowing capacity, market share, and more. network advantages, commercial investments, frequency allocation and grouping. (Pages 84-88)
2. The merger would allow New T-Mobile to participate in the "Convergence Driven Business Model" that Verizon and AT & T both used. (Pages 89-92)
3. Verizon and AT & T have taken a narrow approach to the evolution of 5G, and competition from the new T-Mobile will accelerate and expand the 5G initiative. (Page 93)

Ability to go from Toe to Toe with VZ and T

1. Despite the best efforts of Sprint and T-Mobile, they were unable to gain significant market share gains from the two-thirds controlled by AT & T and Verizon. (Pages 93-94)
2. Sprint is facing serious challenges for the future and can not compete at the AT & T and Verizon level, but will be a junior player. (Pages 94-98)
3. T-Mobile also can not compete at the AT & T and Verizon level, but will also be a second-tier player. (Pages 98-100)
4. The merger will give the new company the tools to bring it to new levels and compete more aggressively with market leaders and new entrants to the market. (Pages 100-102)

Converging industries create a unique market for broadband

1. The wireless space is populated by new competitors beyond traditionally recognized carriers. These include cable operators, satellite companies and content / service providers. (Pages 102-105)
2. Comcast and Charter enter aggressively wirelessly. (Pages 105-111)
3. Dish is getting ready to enter wireless delivery services. (Pages 112-114)
4. Tracfone now provides wireless service to 23 million subscribers. (Pages 114-116)

No significant likelihood of harmful effects or coordinated interaction

1. It would be irrational for New T-Mobile to retain the unused capacity of the new network instead of using it to conquer market share. (Pages 118-119)
2. Economic incentives will come from the improved mobile network. (Pages 119-124)
3. The combined spectrum will give New T-Mobile an additional 4G LTE capacity that it can use today to conquer market share. (Pages 124-128)
4. Coordinated action is implausible because of the diversity of spectrum among carriers and geographical licenses. (Pages 129-132)

No harm to local markets

1. With one exception (Puerto Rico), there would be no local market with fewer than 3 competitors with at least 2% market share. (Pages 132-136)

The financial case

	Book value	Shares issued	Annual revenue	Income per share	BV per share	Price per BV Multiple	Value of the company	Market Cap
TMUS	$ 26.39 B	846.65M	$ 41.17	$ 49.08	$ 26.82	2.25	$ 81.35 billion	$ 51.1 billion
Sprint	$ 22.68 B	4.01 B	$ 32.41	$ 8.10	$ 6.58	.83	$ 53.87 billion	$ 21.96 billion
AT & T	$ 174.00 B	7.33 B	$ 159.22 B	$ 25.84	$ 23.74	1.35	$ 313.86	$ 234.43 billion
Verizon	B $ 50.75	4.13 B	$ 128.00 B	$ 31.30	$ 12.29	3.91	316.58 billion dollars	$ 198.7 billion
New TMUS	49.07B	1.287B	73.58 billion dollars	$ 57.17	$ 38.13	1.35	147.26 billion dollars	$ 85.26 billion

Source: Author (derived from Yahoo Finance.com)

We are aware of the percentage ownership of all major players in the new TMUS, as well as the current shares and percentages that SFTBY and DT currently hold in S and TMUS, respectively. A projected equity issue can be calculated for the New TMUS entity at around 1,287 billion shares.

You can combine the numbers for Sprint and T-Mobile to get the positions and values ​​for the other New TMUS fields in the table above.

They calculated the Sprint stock exchange rate on an estimated price of $ 64.65 per T-Mobile share.

However, if we use the multiple AT & T Price / BV (1.35) multiplied by the current combined book value of Sprint and T-Mobile ($ 49.07 B), we get a true opening value for the new entity of $ 66.25 / share.

This would give us a current value for each Sprint share at $ 6.80 / share.

Now comes the interesting part. When creating the new entity, they will have the opportunity to re-evaluate the assets of Sprint and T-Mobile. Wall Street analysts have been debating for years the real value of Sprint's spectrum. The arguments range from the absence of current value premium due to non-deployment to triple the present value according to the comparative values ​​of the spectrum of other carriers.

The current value assigned to the Sprint spectrum is $ 40. If the spectrum is re-evaluated, it could radically change the base price support per share.

Multiplier	Price per share using the current value of the Sprint spectrum (.67 / MHZ / POP)	Stock price using a 20% premium spectrum value (.85 / MHZ / POP)	Price of the action using the current value of the spectrum TMUS 1.02 / MHZ / POP)
1.35	$ 66.25	$ 77.04	$ 84.60

Conclusion:

These 12 key points addressed in the 425 filing at the FCC paint a solid picture for the FCC to approve the merger. The FCC appears to have a broader scope and scope in terms of the public interest, antitrust and competitive equity.

However, the scope of competition law enforcement of the Department of Justice will be more restricted, but the approval of the FCC approval process will likely make DOJ approval to a almost conciliatory deference to the merger.

In fact, Makan Delrahim, who heads the antitrust efforts of the United States Department of Justice, said he did not see the reduction in the number of major wireless carriers from four to three as inherently bad for the market.

I see very few arguments against the 425 points and premisses, and almost none that can not be refuted and overcome.

I am looking for FAC and DOJ to approve this merger very soon, perhaps as early as the end of August 2018.

Current Sprint stocks are undervalued by 15% to 20% and T-Mobile shares are dumped by 8% to 10%. The difference depends on the valuation method you choose, the original price of the calculation for the merger or the calculation of the book value.

If New TMUS recalibrates the spectrum value, then you can see the current value of the Sprint and T-Mobile action increase by more than 30%.

Disclosure: I am / we are long T, S, VZ.

I wrote this article myself, and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose stock is mentioned in this article.

Editor's Note: This article deals with one or more securities that are not traded on a major US market. Please be aware of the risks associated with these stocks.