MetroPCS T-Mobile Merger Causes Worry For Sprint & Leap Wireless

MetroPCS T-Mobile Merger Causes Worry For Sprint & Leap Wireless
By T-Mobile (File derived from T-Mobile logo.svg) [Public domain], via Wikimedia Commons

The recently announced merger between MetroPCS Communications Inc (NYSE:PCS) and Deutsche Telekom AG (FRA:DTE) (ETR:DTE)’s T-Mobile has disappointed the shareholders of Leap Wireless and Sprint for different reasons. Well, let’s dig a little deeper.

MetroPCS T-Mobile Merger Causes Worry For Sprint & Leap Wireless

Leap Wireless has been incurring losses since 2006, and according to a Bloomberg report, it will keep suffering losses till 2016. In August, its CFO, Jerry Elliott, said that the company is considering all the options, including a sale. The company’s price-sales ratio is lowest among the similar size American wireless carriers, at 0.15.

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Right after the announcement of T-Mobile and MetroPCS Communications Inc (NYSE:PCS) merger, Leap stocks plunged further, by 18 percent. Why? Because, before the merger, MetroPCS was the most logical buyer for Leap. But now, the deal is unlikely to happen anytime soon, because MetroPCS Communications Inc (NYSE:PCS)will need time to integrate its assets with T-Mobile.

“It seems that the only real suitor for Leap was PCS, and obviously if they do this deal with Deutsche Telekom, they’re out of the market for awhile,” says Scott Schermerhorn, chief investment officer at Granite Investment Advisers Inc.

The merger of T-Mobile and MetroPCS Communications Inc (NYSE:PCS) will form the fourth largest telecom operator in the U.S. According to the terms of the deal, Deutsche Telekom will own 74 percent of the new company, while shareholders of MetroPCS will receive $1.5 billion in cash.

But why is Sprint worried? It’s not about stock purchasing. Sprint Nextel Corporation (NYSE:S) is worried because the combined carrier will be strong enough to aggressively compete with Sprint. T-Mobile already has 33 million customers, and MetroPCS has 9.3 million. After the merger, they will get a bit closer to Sprint’s 56 million person userbase.

The merged company will have an annual turnover of $25 billion and net profit of $6.3 billion. The merger will save T-Mobile $6-7 billion in costs. So, the new venture will have “expanded scale, spectrum and financial resources to aggressively compete with the other national U.S. wireless carriers.” On the other hand, Sprint is already under $21.3 billion in debt, much more than its entire market value of $15.6 billion. Sprint doesn’t have enough resources to compete with the newly formed company, and it is already suffering heavy losses quarter after quarter.

Goldman Sachs says that earlier there was a possibility of Sprint/T-Mobile deal, but there were certain challenges. Their combined debt stands at more than $40 billion. Another problem was that T-Mobile was unwilling to be a minority owner in the combined entity with Sprint Nextel Corporation (NYSE:S). After T-Mobile’s merger with MetroPCS, that has gone further away from possibility. Sprint was also eyeing Leap Wireless, and $3.2 billion in long-term debt on Leap might have created further trouble for Sprint. So, it pulled out of the race. Here is the detailed fundamental analysis of Sprint.

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