Sprint/T-Mobile: Breaking Bad
T-Mobile US has seen this movie before.
News that Sprint is considering making a bid for the No. 4 U.S. wireless carrier by subscribers has sparked a 27% rally in T-Mobile shares since Dec. 12's close. But it also has inspired comparisons with AT&T's bid to buy T-Mobile in 2011. Regulators rejected that deal, saying they wouldn't allow a move to three national carriers from four.
So T-Mobile is no stranger to the tough sell. Considering the scrutiny and considerable risk of rejection a Sprint takeover bid would face, T-Mobile will likely want it to come with a big breakup fee. In AT&T's case, that amounted to $4 billion in cash and other assets—or about 10% of the overall offer, a huge proportion.
Applying a 30% control premium to T-Mobile's $25.8 billion current market capitalization implies a deal size this time of about $33.5 billion. At that scale, a 10% breakup fee would be $3.4 billion. For Sprint, which analysts estimate will have earnings before interest, taxes, depreciation and amortization of $6.6 billion in 2014, that would be a significant potential payout.
Sprint likely could trim any breakup fee by offering T-Mobile's shareholders a bigger control premium. But they likely would want that in cash, not stock. T-Mobile already trades at 7.4 times 2014 Ebitda, compared with 6.1 times for AT&T and 5.3 times for Verizon Communications. But Sprint's stock looks even pricier, at 9.2 times.
Before any proposal even gets to regulators, Sprint would have to calm T-Mobile's nerves with a hefty insurance premium.