Verizon Communications Inc. (VZ) Could Be a Winner From Sprint Buyout
Shares of both T-Mobile US ( TMUS) and Sprint Corp. ( S) were down sharply on Monday as investors mulled the possibility of a drawn-out merger approval process. Telecom competitor Verizon Communications Inc. (NYSE: VZ) also traded lower by 4.3 percent, but analysts say the T-Mobile deal could provide an opportunity for Verizon.
Even if the Sprint buyout is eventually allowed to proceed, the regulatory approval process will be a long-term distraction to T-Mobile and Sprint. T-Mobile has said it expects the deal to be completed in the first half of 2019, but analysts are skeptical of that timetable.
Morgan Stanley analyst Simon Flannery says Verizon and AT&T ( T) could also benefit from any court-ordered T-Mobile asset sales that are part of the approval process.
"Verizon could benefit from fewer competitors for spectrum assets and potentially even gain access to some divested spectrum," Flannery says.
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In addition, Flannery says reducing the number of top U.S. wireless service providers from four to three would likely ease some competitive pricing pressures on Verizon, likely one of the primary concerns among regulators.
"AT&T and Verizon could benefit from market consolidation, although the new T-Mobile would be a formidable competitor particularly in new areas such as 5G and fixed broadband," Flannery says.
Bank of America analyst David Barden says the pattern of price cutting and aggressive promotions in the wireless market might ease up if the deal is approved.
"Assuming a tie-up of S/TMUS is approved, we believe it would repair some of the market and potentially see the three companies act more rationally," Barden says.
Barden says T-Mobile will try to make the case that a merger with Sprint would provide a true threat to Verizon, but Barden isn't buying it.
"We think moving from a four- to three-player market structure should benefit the industry over time," he says.
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Barden says the near-term outlook for Verizon stock may be unpredictable while regulators sort out the fate of the T-Mobile deal, but the stock is an excellent long-term investment opportunity given the quality of Verizon's subscriber base and its potential to lead its industry in earnings growth.
Bank of America has a "buy" rating and $58 price target for Verizon. Morgan Stanley has an "overweight" rating for VZ stock.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
