The booming merger and acquisition (M&A) market, in which the value of global deals has already surpassed the $2 trillion mark this year, saw some of the proposals collapsing recently, raising questions about the sustainability of M&A momentum.
The doubts arose as the proposed merger plan between the third and fourth largest mobile network operators in the U.S. – Sprint ((S - Analyst Report)) and T-Mobile ((TMUS - Analyst Report)) – fell apart. Though, on the same day, Twenty-First Century Fox (FOX) pulled off its $80 billion offer to buy Time Warner Inc. (TWX).
Sprint Drops T-Mobile Bid
Softbank-owned Sprint has finally called off its plan to bid for rival T-Mobile as it faces stiff opposition from regulators in an industry dominated by just a few players, according to the Wall Street Journal. Sprint also named Marcelo Claure, founder of mobile phone distributor Brightstar, as its new CEO.
The no-deal is a big blow to SoftBank’s attempts to form a combined entity in the U.S. Telecom space in order to compete with the large caps in the space, namely, Verizon (VZ) and AT&T Inc. (T).
After the disappointment, Sprint will have to work harder to regain its lost subscribers over several quarters. Though the company has finally managed to end more than six years of losses with $23 billion of profit during the fiscal first quarter, it lost 245,000 postpaid subscribers in its most lucrative Consumer segment.
On the other hand, Sprint’s former merger partner has been adding millions of post paid customers by wooing them with lucrative pricing plans (read: Telecom Earnings and Windstream REIT Plan Boost These ETFs).
In the Cards
After the failed merger plans, it’s a wait and see situation to look out for the next move from Deutsche Telecom, T-Mobile’s majority owner. The French telecom company had earlier expressed that it would like to eventually sell off its stake in T-Mobile.
Moreover, T-Mobile might have to face another takeover bid in the wake of this scrapped deal. French mobile carrier, Iliad has recently made an offer to acquire a 56.6% stake in T-Mobile for $15 billion, though T-Mobile intends to turn down the bid. Also, DISH Network Corp. (DISH) had earlier stated that it would be interested in T-Mobile if Softbank’s deal fell apart.
Telecom stocks saw a blood bath during recent trading thanks to the failed deal news. Sprint plunged roughly 19% on elevated volumes of more than 159 million shares – ten times the daily average trading volumes.
Meanwhile, T-Mobile slipped 8.4% on nearly four times the daily average volume. The news led to a contagion effect among the large caps – Verizon and AT&T also slipped more than 1% each.
It also caused a sell-off in Telecom ETFs reversing last week’s gains, when the funds had soared after Windstream Holdings (WIN - Analyst Report) said that it plans to spin off its telecom network business into a publicly traded real estate investment trust (REIT).
Below we have highlighted three telecom ETFs which are expected to be in focus in the upcoming days, following the cancelled merger plans. Investors should avoid these in the near term, but recognize that many have strong ranks and better prospects for longer term outlooks:
Vanguard Telecommunication Services ETF (VOX - ETF report)
VOX is the largest ETF in the telecom space with an asset base of $734 million, but sees moderate trading volume of 45,000 shares a day.
The fund lost roughly 2% following the news, and is down more than 4% in the past one week (see: all the Telecom ETFs here).
The fund is heavily concentrated in its top two holdings – AT&T Inc. and Verizon – which together form 43% of total fund assets. However, Sprint and T-Mobile are also among the top 10 holdings having a combined exposure of 6.2%.
iShares U.S. Telecommunications ETF (IYZ - ETF report)
The fund tracks the Dow Jones U.S. Select Telecommunications Index to provide exposure to a small basket of 26 stocks.
Verizon and AT&T Inc. occupy the top two spots in the fund, having roughly 13% exposure each. Sprint and T-Mobile are also among the top 10 holdings having 4.2% and 4.6% exposure, respectively (read: A Comprehensive Guide to Telecom ETFs).
IYZ has accumulated over half a billion dollars since inception and has a good trading volume of more than 200,000 shares a day. The fund was the biggest loser in its space with more than a 2% decline.
IYZ currently has a Zacks ETF Rank #2 or Buy Rating (read: 2 Hot Summer ETFs Surging to #1 Ranks).
Fidelity MSCI Telecommunication Service ETF (FCOM - ETF report)
The fund manages a small asset base of $67 million with Sprint and T-Mobile having approximately 3% allocation each in the fund. Verizon and AT&T dominate here too, with roughly 22% allocation each.
The fund lost 2% yesterday and is down 4.4% in the past one week. FCOM currently has a Zacks ETF Rank #3 or Hold Rating.
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