There is always a lot of excitement around mergers and acquisitions. This is particularly true when a company has been struggling. When Softbank offered $20 billion to acquire 70% of Sprint Nextel Corporation (NYSE:S), shareholders were understandably excited. Not only did this offer cause their stock to go up, but it also would give Sprint a majority owner with deep pockets to help expand and compete more effectively. In a surprising twist, DISH Network Corp (NASDAQ:DISH) is offering $25 billion to acquire all of Sprint.
What Do You Do In Case Of Slowing Growth? Buy Another Slow Growing Company! I know that Dish shareholders are probably excited about the idea that their company could get its hands on the number three domestic wireless operator. On the surface, the deal sounds logical. DISH Network Corp (NASDAQ:DISH) would be able to market its services to the roughly 55 million Sprint Nextel Corporation (NYSE:S) subscribers. Sprint will be able to expand its product lineup into broadband, video, and voice offerings.
Here is the problem, there are numerous companies already with these offerings, and each of them is far stronger financially than this combined entity would be. The two most obvious examples are AT&T (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). Both of these companies offer wireless, broadband, video, and voice offerings. Competitor Comcast Corporation (NASDAQ:CMCSA) doesn’t offer wireless, but the company’s NBCUniversal division offers growth prospects that DISH Network Corp (NASDAQ:DISH)/Sprint could hope to attain.
Slow Growth And Negative Free Cash Flow….Why Is This A Good Idea? If we pretend for a minute that Dish and Sprint are merged, the first major issue with the company is, their growth rate. Analysts are currently calling for about 5% growth in EPS at Sprint and 5.23% growth at DISH Network Corp (NASDAQ:DISH) over the next five years. Even if we assume this combined entity would increase its earnings growth, their competition suggests this isn’t going to be a fast grower any time soon.
AT&T (NYSE:T) is expected to grow EPS by about 5.5% over the next few years, and Verizon is expected to grow by 7.35%. Even if Dish/Sprint Nextel Corporation (NYSE:S) managed to grow at an average of these two, that still only yields 6.4% growth. The truth is, when you add two slow growing companies together, rarely do you get a vehicle for fast growth in return.
The second issue with this proposed merger is Sprint’s negative free cash flow would seem to more than offset Dish’s positive free cash flow. In the last three years, Sprint has gone from $2.88 billion in positive free cash flow to $1.262 billion in negative free cash flow. By comparison, DISH Network Corp (NASDAQ:DISH)’s free cash flow has essentially stayed flat at just over $1 billion. If you add these two players together, in 2012 they would have produced $235 million in negative free cash flow.