Wall Street is growing more nervous about the fate of the proposed merger of T-Mobile US Inc. and Sprint Corp., as lawyers for the companies prepare to make final arguments Wednesday in defense of their deal.
Shares of Sprint are trading at a more than 40% discount to the value of T-Mobile’s proposed all-stock deal, which is now worth about $34 billion after steady gains in T-Mobile’s market value. It is the widest gap since the merger of the two cellular providers was struck nearly two years ago.
The discount has doubled in recent months as the two companies have tangled in court with a group of state antitrust officials led by California and New York, a sign of growing doubts about the deal.
“The market’s getting more pessimistic,” said Ric Prentiss, an analyst at investment bank Raymond James. He said investors are waking up to the risk that “if this deal doesn’t go through, Sprint’s going to go down pretty hard.”
Representatives for Sprint and T-Mobile declined to comment.
The states argue that combining the country’s third- and fourth-biggest cellphone carriers would hurt consumers. They have maintained their opposition to the deal despite a series of concessions that the Justice Department and the Federal Communications Commission wrested from both companies last year.
Officials from 13 states and the District of Columbia—all Democrats—took the case to trial in December, forcing several high-profile industry executives to testify about the transaction’s merits. U.S. Judge Victor Marrero is scheduled to hear both sides’ closing statements Wednesday morning in Manhattan. He could render an opinion within weeks.
Sprint shares ended Tuesday at $4.86, and T-Mobile closed at $79.80. Japan’s SoftBank Group Corp. owns more than 80% of Sprint’s shares while Deutsche Telekom AG controls T-Mobile. Sprint’s relatively small number of shares floated on the open market has deepened its latest stock swoon.
T-Mobile and Sprint have argued that joining forces would create a stronger and more efficient competitor to market leaders Verizon Communications Inc. and AT&T Inc. Many of the benefits stem from their complementary spectrum-license holdings, which would lower the combined company’s costs for streaming music, videos and other data to its customers.
Wall Street analysts say T-Mobile stands to gain billions of dollars in market value if it clinches the merger, though it is also considered a relatively safe bet without Sprint. The company added more than one million cellphone subscribers in the fourth quarter, continuing a trend of customer gains at competitors’ expense.
T-Mobile’s merger partner faces a worse prognosis. Sprint hasn’t yet reported the last quarter’s results, but the company has struggled to hold on to its most lucrative customers. It has lost money in four of the past five fiscal years.
Sprint Chief Executive Michel Combes testified in December that his company offers “an inferior product” that puts it in a “vicious cycle” of customer losses and dwindling resources. But he and other executives stopped short of saying the company would disappear in the next two years.
The states challenged the companies’ direst predictions during the trial, drawing parallels between T-Mobile’s weak footing in 2011, after government opposition forced it to scuttle a planned tie-up with AT&T, and Sprint’s current predicament. A recent court filing from the states took a glass-half-full view of its situation.
“With the right leadership and a commitment to innovation, Sprint can follow T-Mobile’s precedent and strengthen its competitive position,” the states wrote.
Write to Drew FitzGerald at [email protected]
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