Sprint Cheaper Than 99% of S&P 500 Signaling Merger-Bloomberg WAYS TO PLAY

by Dan March 24, 2011 8:29 am • Commentary

Sprint  $4.50

Top Bloomberg story this morning getting some play (below) that in the wake of AT&T‘s $39bln bid for T-Mobile, and Sprint’s ~10% sell off that the market is valuing Sprint’s assets at ~.92 on the dollar, I can’t speak to that as I am not a financial analyst, but it does make sense that if the combination of T and T-mobile leapfrogs VZ to become the largest U.S. wireless carrier that VZ will be left with no choice other than to further consolidate the market.


Sprint’s 11 percent slide to $4.49 since the T-Mobile USA deal was announced March 20 has left its stock trading below the
company’s $4.87 a share in assets minus liabilities. That means investors can now buy Sprint for 92 cents on the dollar, cheaper than 99 percent of companies in the Standard & Poor’s 500 Index excluding financials, according to data compiled by Bloomberg. Sprint’s licenses from the U.S. Federal Communications Commission, which give it the right to operate its network in specific regions, alone are worth $19.9 billion, 46 percent more than its market capitalization of $13.6 billion, the data show.

As a rule it probably doesn’t make a ton of sense to load up your portfolio with every rumored take-over candidate, either long the equity or long outright calls, because unless you know something you shouldn’t your success rate won’t be that high.  And if you do know something you shouldn’t the SEC’s first stop after announced deals is too look for strange options activity prior to the deal announcement. PSA: don’t trade on inside info, exhibits A-Z: the 26 perp walks since Oct 2010.  moving on…….

To put on a take out trade structure in Sprint you have to agree on a few things first:

1. There is a strong likelihood that the feds approve the T-Mobile deal, this could take up to a year, maybe longer,

2.If deal looks like it is going to get approved, will VZ will have no other choice but to grab U.S. market share?  The answer will clearly be yes, and S will have very few alternatives as it will become difficult to compete nationally with 2 even stronger players.

3.have a level of confidence that Sprint won’t make its own dumb acquisition to better compete with VZ, T and T-mobile that would cause the stock to remain depressed…..They were rumored to be looking at T-mobile and they dont even use the same technology, so they maybe looking at other more regional or nichey players like US cellular or Leap.

I am sure I missing a few other things to contemplate, but those are the ones that I am focused on as I evaluate the merits on putting on the trade…..

DEAL PRICE GUESS: let’s assume $5.50 to 6.00 as that would be a 3 yr high and a slightly premium to what T proposed for T-Mobile. (Please sign in or sign up for Free Trial to read trade structures)


1. You could always just buy the stock here as your downside probably not more than 1.50 to about $3.00 which was essentially the low in 2009, but this is a website about options….so let’s disqualify that silly suggestion.

2. Classic take out structure- Call Spread Risk Reversal– you will want to give yourself some time possibly look as far out as Jan12, the deal won’t likely get approval by then but the battle lines will be drawn and VZ will probably have to move sooner than later……

TRADE: Sell the Jan12 4 Put to buy the Jan12 4.50 call and Sell the Jan13 7.50 call

-Sell 1 Jan12 4 Put at .43

-Buy 1 Jan12 4.5 call for .72

-Sell 1 Jan13 7.5 call at .34

Structure results in a .05 credit, You are taking in .77 for selling the Jan12 4 put and the Jan13 7.5 call, and paying out .72 for the Jan12 4.50 call


On Jan12 expiration:

-if stock above 4.00 but below 4.50 the Jan12 4 put and the Jan12 4.5 call expire worthless and you are short the Jan13 7.50 call naked.  At this point you will have to make a decision whether or not you feel the company will be taken out, if you still feel strong liklihood than you either want to buy a call or buy the stock and turn it into an overwrite.

-if stock is above 4.50 but below 7.50 then the Jan12 4 put will expire worthless and you can either excercise the Jan12 4.50 call or sell it and take the profit and cover the Jan13 call if you no longer think the company gets taken out. But if you still think it gets taken out proceed as suggested above.  If the stock is not anywhere near 7.50 at this point the Jan13 call will have likely decayed a bit and not appreciated.

-BEST CASE: lets say u get a $6.00 deal in Sept, the Jan12 4 put will likely go to zero and the Jan12 4.5 call will trade like stock (with little extrinsic value), but the Jan13 7.5 call is likely to lose most of its time value (especially if it is a mostly cash deal like the T/T-mobile deal) as the market will assume that the deal will be done and price those longer dated options differently.


-Buy the stock at 4.50 and sell the Jan13 7.50 call at .33


-On Jan13 expiration if stock below 4.17 you lose money

-btwn 4.17 and 7.50 can make up to 3.33