A Cellular Mega-Merger
Cellular giants T-Mobile (TMUS - Free Report) and Sprint (S - Free Report) announced their intention to merge on Sunday in a deal that would create a new company (to remain named “T-Mobile”) with a combined customer base of 125 million customers, putting it in the league of AT&T (T) with 141M subscribers and Verizon (VZ - Free Report) , with 150 million.
The deal is certain to face stiff regulatory scrutiny because it would reduce the number of large carriers from 4 to 3, potentially stifling competition. T-Mobile CEO John Legere - who will lead the new company if the deal goes through - said in a conference call on Sunday and reiterated in several Television interviews on Monday that because of the scale of the combined enterprise, they could potentially offer improved service and lower prices, forcing the other big networks to compete on price.
Legere claims that the merger will create thousands of jobs. He also points to the larger company’s ability to compete with Chinese competition in establishing 5G networks, an argument that’s likely to be popular with the business-friendly the Trump administration. The Federal Communications Commission and The Justice Department are likely to view the proposed deal with skepticism however, as the typical reasons for large mergers are a reduction in expenses and an increase in pricing power, contrary to how Legere portrays the deal.
Fifth Place to Fourth
If the deal is approved and completed, it seems likely that the three remaining major carriers would enjoy reduced competition and could potentially raise prices and/or limit service offerings to increase profitability.
Another carrier could be an unlikely beneficiary of the merger – U.S Cellular (USM - Free Report) .
Currently the nation’s fifth largest carrier with 5 million customers, U.S. Cellular has considerably less network coverage that its larger competitors and relies on roaming agreements to provide coast to coast coverage.
Rising prices for cellular service could either allow U.S Cellular to raise its own prices, or could also encourage disgruntled customers of the big carriers to seek out lower priced alternatives.
U.S. Cellular has been on an earnings win streak of late, beating the Zacks Consensus estimate in three of the last four quarters and meeting expectations in the fourth. Analyst estimates going forward are rising, with expectations that they will report $0.29/share when they report tomorrow – up 123% from the $0.13 that was expected just 90 days ago.
Full year earnings estimates have risen as well, currently standing at $0.82/share, 42% higher than the $0.58/share U.S. Cellular posted in 2017. USM earns a Zacks Rank #1 (Strong Buy).
While the big mergers tend to dominate press coverage when deals are announced, savvy investors look for smaller companies that stand to benefit as well. U.S Cellular could certainly be one of those companies.