A Mobile Carrier for M&A Speculation, Not for Investment

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the stock market, investors should be aware of any large price swings. We all know that it would be very irrational for a business, which was worth $1 yesterday, is worth only 50 cents or $2 today. We should not be influenced by it. Instead, we should consider it as an opportunity and take full advantage.

What happened? This morning, Sprint Nextel Corporation (NYSE: S) jumped as high as 13.3% pre-market, from $5.04 to $5.70 per share. Year to date, Sprint’s stock price has experienced a nice rise from $2.34 at the beginning of the year.

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At $5.70 per share, the total market capitalization is $17.1 billion. With cash on hand of $6.7 billion and $21 billion interest-bearing debt, the enterprise value is as high as $31.4 billion.

Why? The sudden rise in its stock price is due to the acquisition news between Softbank and Sprint Nextel. Japan's third largest mobile carrier was in talks to acquire more than two-thirds of Sprint Nextel for at least $12.8 billion. It said that the Sprint acquisition would make the procurement of smartphones cheaper for Softbank. If $12.8 billion represents two-thirds of Sprint Nextel, Softbank would place a $19.2 billion valuation on the target.

Earlier this year, Sprint Nextel offered $8 billion (debt included) for MetroPCS . But yesterday, Sprint Nextel postponed its counterbid for MetroPCS because it wanted to look into Deutsche Telekom’s regulatory filing for MetroPCS/T-Mobile deal. An announcement of the merger has pushed its stock price more than double since the beginning of the year.

My take: Among mobile carriers in the US, Sprint Nextel doesn’t seem to be attractive. It is behind AT&T (NYSE: T) and Verizon (NYSE: VZ) in developing LTE network for new 4G standard. It is interesting to note that Sprint Nextel’s market capitalization is $17.1 billion, whereas the market cap of AT&T and Verizon is 8-12 times higher, of $213 billion and $130.4 billion respectively.  Sprint Nextel is trading at a 1.6x P/B whereas AT&T is at 2.1x and Verizon is at 3.5x. It seems to be cheap on a relative basis.  However, the company is carrying itself a mountain of debt which is more than its market capitalization. Its D/E ratio is 2.3x, much higher than that of AT&T (0.6x) and Verizon (1.3x). Personally, I think Sprint Nextel could only be a good stock to play on a speculative M&A news basis, but certainly not a good stock for long-term investment. 



hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.

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