Sprint Takeover Talks Make this Company a Buy
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The disclosure that Sprint Nextel (NYSE: S) had begun acquisition talks with Softbank, Japan’s third largest wireless carrier, sent shares screaming nearly 15% higher. Shares of competitors Verizon (NYSE: VZ) and AT&T (NYSE: T) were each down roughly 5% last week, largely on concerns that a cash infusion will spark a more serious challenge from the number three U.S. wireless provider. While a completion of the transaction has the potential to alter the landscape of the wireless battle in the U.S., last week’s performance disparity represents an opportunity to buy shares of Verizon, which remains the most attractive of the three companies.
Is This News?
Speculation over the potential union of Sprint and Softbank has become the hottest topic in wireless since the release of Apple’s (NASDAQ: AAPL) iPhone 5. Every detail from the regulatory environment to the impact on rivals has come under intense scrutiny, the general consensus being that the deal has the potential to stir up the wireless market in a much needed way. Softbank will give Sprint the resources to rapidly build its LTE network, allowing it be more competitive, and may provide the cash to acquire the remaining stake of Clearwire not currently owned by Sprint.
Bloomberg reports that Sprint expects the deal to be quickly sanctioned by the U.S. Justice Department during its initial review period, with no further inquiry being deemed necessary. This should not come as a great surprise to industry watchers, given recent concerns expressed by regulators that the U.S. market has become a near-duopoly; Verizon and AT&T currently control roughly 75% of the market. Increased competition will be welcomed.
As a matter of fact, increased competition will greatly benefit consumers over the long term. As smartphone and tablet penetration continue to rise, the data-intensive LTE network has already begun to put pressure on Sprint’s unlimited plans. As a revitalized and suddenly legitimate competitor in the market, Sprint should change the equation. Any respectable game theorist with a PhD will tell you that the increased complexity added by a third participant relative to what exists between only two is dramatic.
This increased competition should influence pricing and service as soon as Sprint is taken more seriously. Another beneficiary of the deal will be device makers like Apple. Since the expiration of AT&T’s exclusive control over the iPhone, Apple has enjoyed increased flexibility in its negotiations with carriers. A third player will give Apple even greater bargaining power within the market.
How Does Verizon Benefit?
As I noted above, the announcement of the potential transaction created a significant performance differential between Sprint and its competitors. Even if this deal rockets through regulatory approval, shareholder approval, and sidesteps every conceivable impediment lying in wait, it will be several quarters at minimum before any of this change will realistically hit the bottom line. While I do acknowledge that stock prices are often as much about expectations as about the immediate influences, assuming the deal closes, the hype will pass.
“But the stock may be transferred at a premium! What about a tender offer?” There are plenty of potential price drivers for shares of Sprint, and I am not advocating against the company, but rather suggesting that the sell-off in Verizon presents an opportunity. The company’s current 4G LTE network simply eclipses its competitors, and it's still growing. AT&T and Sprint may catch up some day, but today Verizon is positioned for success. In the second quarter, Verizon added 888,000 high-value postpaid subscribers, while AT&T added 320,000. Other operational metrics and coverage comparisons are equally slanted in favor of Verizon, while financial metrics are roughly comparable between the two giant telecom companies.
The Trade
The longer-term impact of the Sprint deal is a clear disruption to the status quo in the wireless market, but it is likely to be several quarters until that influence is felt. In the interim, Verizon’s sell-off gives you a chance to buy shares on a nice dip that should enhance your overall return. With a dividend yield over 4% and strong medium-term prospects, Verizon is a buy.
Compare and Contrast
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dsewrites has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
