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Sell AT&T Inc. (T) and Verizon Communications Inc. (VZ): Sprint Nextel Corporation (S) Has an Overwhelming Advantage

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So now we all know that Sprint Nextel Corporation (NYSE:S) is going to be bought out by SoftBank, and that Sprint will also buy out Clearwire. The super company has been formed, so let’s find out how well it will be able to stack up against AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).

Economies of scale will match up

Source: SoftBank

Based on this figure, it is estimated that Sprint/SoftBank capital expenditure spending will be the second largest in the world amongst all telecom companies. What’s good to hear is that Sprint Nextel Corporation (NYSE:S), with its recent buyout of Clearwire at $5 per share, will give the combined entity a whopping 185 MHz of spectrum. Comparatively speaking, AT&T Inc. (NYSE:T) has 106 MHz of spectrum and Verizon Communications Inc. (NYSE:VZ) has 107 MHz of spectrum. Sprint will be better capitalized, and will have greater access to frequency ranges that may give Sprint Nextel Corporation (NYSE:S)’s customers the advantage of a network that can handle higher levels of bandwidth.

Sprint Nextel Corporation (NYSE:S)

This is heavily dependent on the amount of capital expenditure spending that Sprint/SoftBank will pull together, however. Based on the figure below, it is highly probable that the amount of capital expenditure spending put forth by the company will be substantially higher than it has ever been before.

Source: SoftBank

Going forward, the company’s capital expenditure spending should result in a 26% reduction due to volume discounts. The resources being used to build SoftBank’s 4G LTE network will instead be used to build out Sprint’s Network Vision as well. Because of this rapid shift in spending, the amount of money dedicated to Sprint Nextel Corporation (NYSE:S)’s 4G LTE network will drastically increase from its current $4.4 billion. Comparatively, AT&T Inc. (NYSE:T) spent $10.8 billion in mobile capital expenditure and Verizon spent $8.9 billion in mobile capital expenditure. It is likely that Sprint will be able to build a network that is of as high of a quality as both Verizon Communications Inc. (NYSE:VZ)’s and AT&T’s.

Sprint’s fundamentals

Source: Sprint

Sprint Nextel Corporation (NYSE:S) has been able to increase the number of its subscribers drastically over the past two years. This is driven by the fact that the company charges a lower price and also offers unlimited data. The company charged lower prices in the past, but it wasn’t able to generate enough in terms of revenue and net income in order to invest back into its network. This made it difficult for Sprint to compete against the major carriers in terms of network quality. Because Sprint Nextel Corporation (NYSE:S) is now partnered with Softbank, however, the amount of capital expenditure spending will rapidly increase. The quality of its 4G LTE network will drastically improve as a result.

In a survey by Piper Jaffray, 37% of survey respondents reported that having unlimited data is important for determining a carrier. This is something that Sprint provides that AT&T Inc. (NYSE:T) and Verizon do not. What’s more interesting is that 45% of survey respondents found that having a 4G LTE connection is important. Based on the data, we can assume that Sprint has been growing its subscriber based because of its unlimited wireless data. The only problem the company has is the coverage of its 4G LTE network, but it is working really hard to build this out.

Going forward, it is likely that both Verizon Communications Inc. (NYSE:VZ) and AT&T may lose market share or be forced to charge lower prices on its mobile plans. Because of this, both companies should be avoided even though they both pay out really humongous dividend yields. This is an even larger concern for T-Mobile US, as the company doesn’t have as much wireless spectrum or as much dry capital to compete with Sprint Nextel Corporation (NYSE:S)/Softbank.

How to position

Source: Ycharts

Investors are anticipating that both Verizon and AT&T Inc. (NYSE:T) will be affected by the merger between SoftBank and Sprint. I arrived at this conclusion because the stock prices of both AT&T and Verizon Communications Inc. (NYSE:VZ) have remained flat for the year.

Both companies are too large to buy out any competitors, so there’s no real growth catalyst for either company. Both may attempt to buy mobile companies in other countries, but while all of that is happening both AT&T and Verizon will be hit hard by Sprint domestically.

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