Merrill Lynch does think the combination would be accretive to free cash flow and most likely dilutive to earnings. In addition, the team cites the many statements already being made by Sprint, T-Mobile and Softbank, the company that owns Sprint, alluding to how the company will be run, pricing, pursuit of future spectrum and more. All of this may or may not help the overall case.
At the end of the day, Merrill Lynch thinks that if Sprint and T-Mobile spend the next 12 months or more trying to convince regulators of their doom as standalone companies, and the deal does fail, what should investors that own the stocks take away from these arguments? It seems clear to the analysts looking at all sides of the deal that any premium valuation the two companies command today based on market optimism regarding their prospects as a combined entity would be gone with the wind if the deal falls through.
Merrill Lynch rates both stocks at Underperform, and given the price targets they have on them, investors may want to call their brokers and see what it would cost to borrow a stock for a short sale. Merrill Lynch has a $5 price target on Sprint, which closed trading Friday at $8.78. In an even larger bearish call, it put a $12 price target on T-Mobile, which closed Friday at a whopping $33.77. Clearly, the Merrill Lynch analysts are the ultimate skeptics.
An end result of this proposed merger is that nothing can really stop the companies involved from setting and announcing their deal. There are risks in what happens after the deal is announced. While the stocks probably will become more volatile, the final verdict could take forever. And as the Merrill Lynch report states, if the deal doesn’t go through, both stocks getting crushed is entirely possible.
From the standpoint of our readers who may be interested in a trade, consider creating your own focus group. Ask your friends, acquaintances at work, school or the gym, or even the person next to you in line, if they use Sprint or T-Mobile. It likely will show you that neither company dominates the wireless world. Also, Sprint and T-Mobile have no landline businesses either, which is a declining business but at this point it is generally considered to be an easy profit and cash flow.
The bottom line is very few will respond yes. That could tell you all you need to know about the overall viability of one or both of these companies, apart or together.