T-Mobile, Sprint Stocks Sink After Merger News

T-Mobile and its parent Deutsche Telekom will be in control of the combined company

Apr 30, 2018 at 10:13 AM
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Speculation surrounding a potential merger of telecommunication firms Sprint Corp (NYSE:S) and T-Mobile Us Inc (NASDAQ:TMUS) has been swirling for years. Over the weekend, the two confirmed a roughly $26 billion all-stock deal, with TMUS CEO John Legere picked to lead the combined company. T-Mobile parent Deutsche Telekom will hold a 42% stake and control voting rights for 69% of the firm, while Sprint parent SoftBank will have a 27% stake.

News of the deal -- which faces a long regulatory road -- has TMUS stock down 5.6% at $60.93, dropping below its year-to-date breakeven mark (Sprint stock, meanwhile has plummeted 12.8% to trade at $5.67). Following a nearly five-year rally that culminated in a May 2017 record high of $68.88, the stock's price action has been choppy. Specifically, the shares have stayed mostly range-bound between $57 and $66, outside of a short merger-induced drop to annual lows near $55 last November.

Most of Wall Street remains optimistic toward TMUS. Of the 21 analysts covering the shares, 18 maintain a "buy" or better rating, while the average 12-month price target of $74.24 is a nearly 22% premium to current trading levels. In fact, Citigroup today upped its price target on T-Mobile stock to $83 from $76.

Plus, options traders have initiated long calls relative to puts at a quicker-than-usual clip in recent weeks -- possibly to bet on post-earnings upside after the company releases its quarterly results tomorrow evening. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), T-Mobile's 10-day call/put volume ratio of 6.33 ranks in the 78th annual percentile.

Whatever the reason, these call options are pricing in remarkably high volatility expectations compared to their put counterparts. TMUS stock's 30-day implied volatility skew of negative 52.1% ranks in the 1st annual percentile.


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