If Sprint buys T-Mobile, it may have to slash prices: analysts

[June 10, 2014]  By Marina Lopes

WASHINGTON (Reuters) - If Sprint Corp acquires T-Mobile US Inc, it could save up to $6.6 billion on network, equipment and operating costs, but it will have to slash its prices to match the target company's steep discounts, analysts said on Monday.

Sprint, under Chairman Masayoshi Son, has been hesitant to join other carriers in cutting fees because a decline in revenue would hurt its stock price, analysts say. Its shares have risen 8 percent since Dec. 12 on speculation it was looking to acquire T-Mobile from Deutsche Telecom AG.

"I think he's realized he's between a rock and a hard place. Sprint’s prices are much too high, but if Sprint cuts prices, its stock will fall," said Craig Moffett, lead analyst at MoffettNathanson. "They don't come close to justifying their stock price."

The price differential is just one hurdle that Sprint, which is 80 percent owned by Japan's SoftBank Corp, would face if it pursues a deal to buy T-Mobile.
 

Son has argued to U.S. regulators that a merger would give the companies leverage to compete against AT&T Inc and Verizon Communications Inc. The new company would boast more than 100 million subscribers, just behind both Verizon and AT&T.

But the Federal Communications Commission, which in 2011 rejected AT&T's bid for T-Mobile, has repeatedly said it wants to maintain four competitors in the wireless industry.

Unease about whether Sprint can overcome regulatory hurdles sent its stock down 9.3 percent to $8.77 since details emerged of a potential bid last Wednesday.

Sprint customers spend an average of $62 a month, compared with $50 for T-Mobile.

"It is not a sustainable situation. If the companies merge, they will need uniform pricing across the company," said Michael McCormack, a lead analyst at Jefferies.

Sprint and T-Mobile did not immediately respond to requests for comment.

Sprint has agreed to pay about $40 per share to buy T-Mobile, a person familiar with the matter told Reuters last week. None of the companies involved in the potential transaction have confirmed that a deal is imminent.

The proposed acquisition comes as a massive overhaul of Sprint's network is degrading the quality of its phone calls, which it says has cost it 2.5 million customers in the past five quarters.

T-Mobile, on the other hand, added the most subscribers in the first quarter of 2014 as it launched aggressive discounts that have forced its competitors to cut prices.

But the company's strategy has come at a steep cost. T-Mobile lost $151 million in the first quarter and fell short of analysts' earnings estimates.

(Editing by Eric Walsh)

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