One of our favorite whipping boys just received more bad news...
For the past several months, wireless carriers Sprint (S) and T-Mobile (TMUS) – the third- and fourth-largest companies in the industry – have been in merger talks. A joint entity would have boasted more than 130 million U.S. subscribers.
That still would have come in third behind Verizon (VZ) and AT&T (T), both of which have more than 138 million U.S. subscribers today... But it would have helped to close the gap.
However, the deal fell through last weekend... In a joint statement, the companies said they were "unable to find mutually agreeable terms." Essentially, SoftBank (Sprint's parent company) and Deutsche Telekom (T-Mobile's parent company) didn't support the idea.
This news should come as no surprise to Stansberry's Investment Advisory subscribers... In the May issue, Porter and his team of analysts explained why they were skeptical the deal would go through. As they wrote...
A merger with Sprint, it is argued, would allow T-Mobile to compete with larger rivals Verizon and AT&T. A merger is likely the only way to save Sprint from bankruptcy. But T-Mobile's big spectrum haul makes this less likely.
Sprint's licenses are predominantly in the 2.5 gigahertz (GHz) range, which is high-band spectrum. And in total, Sprint owns more spectrum than any other cellphone carrier. But the Federal Communications Commission doesn't want too much spectrum held in the hands of too few companies. So with T-Mobile adding a significant amount of spectrum to its portfolio, regulators now have more reason to block a merger between Sprint and T-Mobile.
Nonetheless, until this week's sudden decline, Sprint's stock price had rallied as merger negotiations between carriers can now resume. (Bidders were blocked from pursuing deals during the auction process.) There's even talk that Sprint could come together with a cable company.
Keep in mind, Sprint's main problem is its colossal $41 billion pile of debt. Many cable companies are highly leveraged as well. And even if they weren't, why would any company want to assume all of Sprint's liabilities? They wouldn't. Sprint's interest expense is now $2.5 billion per year... and rising.
We don't see a viable suitor for Sprint, whether it be another wireless carrier or a cable company. Between its debt burden and the raging carrier price wars, Sprint is doomed.
Porter and his research team recommended shorting the $25 billion company's stock back in February. As they explained to subscribers at that time, Sprint was a profitless and broken business...
A day may come when Sprint's high-band frequencies become more valuable. Advances in network and signal-transmission technology could make that possible.
But time is not on Sprint's side...
Sprint will likely have to reorganize long before that happens. Sprint has to deal with a huge pile of debt, which was taken on by building out its network and buying companies. And now, Sprint's spectrum licenses are becoming inextricably linked with this massive and growing debt load.
Shareholders should value Sprint – including its spectrum assets – based on future cash returns... But it's not generating any cash... and isn't likely to anytime soon. Sprint's future looks bleak. It lacks a competitive advantage in a very crowded industry...
And in a clumsy effort to steal customers away from its rivals, Sprint had created a price war in an industry that was already highly competitive. More from that issue...
The incentives and heavy discounting drove down revenue and margins. Sprint's revenues have fallen over the last two years from around $35 billion to $33 billion. Its rivals suffered, too. AT&T's wireless revenues fell for the first time from around $74 billion to $73 billon. Market leader Verizon's wireless revenues fell 3% to $89 billion. Only T-Mobile managed to grow revenue.
But Sprint was the least prepared to fight the price war it started. And it's the clear "loser"...
Of the big four U.S. carriers, Sprint is in the worst financial shape. Its operating margins and cash flows were already much worse than its competitors' before the price wars began.
Worst of all, the company has a huge wall of debt coming due within the next five years. Sprint's debts have nearly doubled since 2010 as it has struggled to keep up with the rest of the wireless industry...
Almost $10 billion, or 30%, of Sprint's total debt matures in the next three years. And $17 billion – more than half of its debt – matures in the next five years...
Sprint has $2.8 billion worth of debt coming due this year. It has $6.1 billion in cash and $3 billion of available credit. It can pay off its debt maturing in 2017 without a problem... But it has another $6.8 billion worth of debt coming due in 2018 and 2019. That's a daunting wall of maturities for an already highly leveraged company that doesn't generate any free cash.
Sprint features the lowest margins in the industry. It doesn't have any profits over the last decade. It has the most debt (and the most debt coming due) of any major wireless carrier. Its network is the lowest-rated and needs the most capital expenditures to maintain. And its cash flows are negative cash flows.
So it's easy to see why Porter and his team recommended selling the stock short... So far, Stansberry's Investment Advisory subscribers are up about 30%. And with the potential merger with T-Mobile now off the table, shares are likely headed even lower.
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