The merger between T-Mobile and Sprint is expected to come to fruition by Q2 2019, as the U.S. Department of Justice and FCC complete their review of the transaction. The cost synergies stemming from a merger are expected to be significant, coming in at about $6 billion per year within four years. In this note, we take a look at the key areas where the companies are looking to cut costs, and how this could impact the valuation of the combined entity.
Our interactive dashboard on what’s driving T-Mobile’s valuation details our expectations for the company through the rest of the year and the factors driving our valuation estimate.
Operating a wireless network entails significant fixed costs relating to capital expenditures as well as operating expenses such as switch and cell site costs that include rent, network access costs, utilities, and maintenance. The companies expect their annual network related cost savings to come in at about $4 billion a year, with the entire network integration process likely to take three years. However, the joint entity is expected to incur about $10 billion in costs towards the network integration process, which will include the decommissioning of as many of 35k towers, mostly from Sprint Network. The net present value of these synergies, net of integration costs, discounted at 8% would come in at about $26 billion.
There are likely to be significant savings in selling, general and administrative (SG&A) costs as well. For instance, the combined entity is expected to see run-rate synergies relating to sales, service, and marketing of roughly $1 billion, with back-office related savings – which include IT, billing, back office costs – to come in at $1 billion. However, the integration process could take as long as four years. Net of the costs of integration, which are projected at about $5 billion, the present value of the SG&A-related synergies are expected to come in at about $17 billion. Overall, the present value of the cost synergies relating to the deal is likely to come in at about $43 billion, pre-tax. Separately, there could be scope for meaningful revenue synergies as well, considering that the joint entity will have a deep spectrum position, which could allow it to enter other areas with minimal incremental spending.