On Friday, Bloomberg reported that SoftBank is exploring a deal for Sprint (S) to scoop up the majority of T-Mobile US (TMUS). The news outlet reported that SoftBank has discussed financing a bid with as many as six banks, including Credit Suisse, Mizuho, and Goldman Sachs. The banks are reported to be the same ones that backed the SoftBank-Sprint tie-up. According to Bloomberg’s sources:
The plan would be to take control of T-Mobile by paying cash for the 67 percent stake owned by Deutsche Telekom AG…Sprint would then be integrated with T-Mobile, combining the third- and fourth-largest U.S. wireless carriers. Deutsche Telekom has said that it’s prepared to sell its $16 billion stake in T-Mobile, which has mostly been an unprofitable U.S. outpost for the German phone giant.
Consolidation in the telecommunication industry is running wild, and while we don’t like engaging in speculative takeover activity, we’re taking notice. We value T-Mobile at roughly $28 per share on a standalone basis, but the market is placing the combined cost-savings and spectrum value to Sprint at over $31 per share. Bloomberg was quick to report that debt concerns are an issue for this transaction, and SoftBank is being cautious to avoid a large break-up fee. Market participants are viewing this as a positive for Sprint, too, with its shares now surpassing the high end of our fair value range.
Valuentum’s Take
We’re playing close attention to the news flow in the telecommunications space, but we remain comfortable with our position in industry participant DirecTV (DTV) at the moment. DirectTV’s large subscriber base, leading brand name, and substantial programming content make it our favorite idea in the space. We think shares are worth $80 each, materially higher than the $66 per share mark at the time of this writing. It’s also possible that DirecTV’s rumored merger partner Dish Network (DISH) may make a run at T-Mobile, putting it at odds with SoftBank again; both had been in a bidding war over Sprint in 2013. Our best ideas continue to be in the Best Ideas portfolio and Dividend Growth portfolio.
Telecom Services: BCE, CTL, DCM, EQIX, FTR, PT, S, T, TMUS, TWTC, VOD, VZ, WIN