(By Karl Denninger) The instant reaction yesterday to the "revelation" that Metro PCS (PSC) and T-Mobile were "talking" (and which is now reported as a deal that has been made this morning) sent Sprint's shares down sharply.
But my first read on this deal is that the analysis on "harm" to Sprint is likely to be wrong for several reasons.
First, T-Mobile and Metro PCS have different and incompatible network architectures. The immediate reaction in PCS shares was to skyrocket 20%, but one wonders if anyone thought about this from more than "next 5 minutes" perspective -- after all, we do have an example of what can happen when you try to merge incompatible networks from recent years (Sprint/Nextel anyone?)
Second, the clear and stated motivation in this deal is for Deutsche Telecom to find a way to "monetize" (read: spin off and walk off!) from T-Mobile. Giving them a US-trade equity symbol to do that with is rather more-likely to be the primary motivating factor here. DT has long wanted a way out this door; despite all the arm-waving they don't seem to be all that interested in actually operating a network here in the United States, although they have spent pretty heavily on network build-out over the last 24 months.
Then there's the fact that Metro PCS is a "major market only" provider, and T-Mobile has quite a bit of spectrum in those areas already, along with the fact that LTE is more spectrum-efficient than HSPA+ -- and thus T-Mobile, as they convert, already gains effective capacity.
And finally, like it or hate it, neither has the iPhone.
One "unquestionably" good thing is that the FTC and FCC are unlikely to oppose this merger; indeed I suspect both will cheer their opposition to the T-Mobile/AT&T deal as "creating" the environment where these talks too place and led to a merger as a "big win" for their action and pat themselves on the back. Yeah, ok.
Nonetheless my "first blush" look at this deal is that it doesn't hurt Sprint and might help them. Metro PCS is likely to lose customers who were marginally attached; being a no-contract company those customers can more-easily jump ship than contract customers anyway, and now they have a reason to do so as spectrum gets re-purposed and their devices either impaired or made worthless over time. This is always a risk with incompatible technologies and while it was "poo-pooed" with Nextel due to ordinary turnover and the expected integration timetable we've all seen the results -- that was a bad assumption that was disproved. The only question is whether this holds up in the general sense or was Sprint/Nextel specific.
Who will those marginally-attached customers go to? Probably not T-Mobile.
Probably Virgin or Boost, both of which now have quite-credible higher-end prepaid devices and both of which are Sprint brands.
I haven't run the numbers on PCS to see if it makes sense to get involved there; my first-blush look is that you missed it unless you were in the name before yesterday, and if you were, I'd be setting a stop on that position and be prepared to take your money.
But for Sprint, which got pounded, I don't think this changes their story at all. There was an abortive attempt, if you remember, in them acquiring PCS some time ago but the deal was zorched by the Sprint board. I think that was probably the right decision at the time and still looks ok, even given what just happened.
I still think the risk:reward favors Sprint -- and so long as their operational metrics continue to show improvement, which we will get another look at here in a few weeks, I will continue to think so. This sell-off came from a position of higher risk than I'd typically like, but with a nice banked profit and the technicals taking the stock back to the 50MA, with a relatively clean place for a stop, if you missed the run you might have just been given a second shot at one of the best stories of the year.
Disclosure: The author has a long position in this name and continues to trade it.