RBC Capital Markets has released a report that a merger between Sprint and either Leap Wireless or MetroPCS is not only possible but makes sense. This is not the first time this has come up. In late February of this year, it was widely reported that Sprint’s board rejected a proposal to acquire MetroPCS for $8 billion in an all-stock transaction, because of the dilution to Sprint equity.
The key component that has changed since February is the outperformance of Sprint’s equity versus that of Leap or MetroPCS, which translates into less equity dilution in a stock-based transaction and more attractive EBITDA multiples, according to RBC.
“In light of Sprint shares’ significant outperformance versus Leap and PCS, we believe a bid for Leap or MetroPCS is a distinct possibility,” Jonathan Atkin, RBC analyst, wrote. Additionally, refinancing either the debt of Leap or MetroPCS has decreased by between $50 million and $60 million since February, RBC statistics show.
Either Leap Wireless or MetroPCS would be a good fit, because like Sprint, they are facilities-based wireless operators that use CDMA technology at 1.9 GHz.
“As such, an integration by Sprint of either company would entail minimal technical risk, require no handset migrations, and quite possibly drive top-line ARPU synergies, because of the elimination of a prepaid competitor, and churn improvement due to the elimination of a competitor as well as the likelihood that the acquired customers would find themselves with superior network quality and coverage,” Atkin wrote.
Atkin does not believe a merger would provide any conflicts with Sprint’s ongoing Network Vision project deployment. Additionally, a merger would most likely not receive pushback from federal antitrust regulators. In fact, Atkin noted, no other pairing between carriers makes any sense.
“[A merger of] Sprint/T-Mobile or a different national carrier (AT&T or T-Mobile) purchasing Leap or MetroPCS would be unrealistic given recent statements by company managements, technology incompatibilities and regulatory uncertainties,” Atkin wrote.