The analysts’ price targets were presented for reference purposes only, and were not relied upon for valuation purposes.
Raine compared the implied exchange ratios resulting from its analysis to the implied exchange ratio of a number of shares of Sprint common stock for each share of T-Mobile common stock of 9.75x derived from the exchange ratio in the merger.
Premiums Paid Analysis
Raine applied a range of illustrative acquisition premiums of 15% to 30% to the unaffected per share price of Sprint common stock as of April 9, 2018, which resulted in prices that ranged from $5.91 to $6.68.
The premiums paid analysis was presented for reference purposes only, and was not relied upon for valuation purposes.
Miscellaneous
The Sprint board of directors selected Raine as its financial advisor because the professionals of Raine have substantial experience in similar transactions. Raine, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions and valuations for corporate and other purposes. Raine has acted as a financial advisor to Sprint in connection with the merger and will receive fees for such services, including an announcement fee equal to $10 million that became payable following the execution of the business combination agreement and the announcement of the merger transactions and a success fee equal to $30 million payable upon the completion of the merger. Sprint also agreed to reimburse Raine for certain expenses and to indemnify Raine against certain liabilities arising from the parties’ engagement. In the two years prior to the date of its opinion, Raine frequently provided financial advisory and investment banking services to SoftBank, the majority equityholder of Sprint, which are unrelated to the merger, for which Raine received customary compensation. Further, SoftBank previously engaged Raine to act as SoftBank’s financial advisor in connection with its consideration of a potential transaction between Sprint and T-Mobile, including a potential merger, which engagement has been completed and for which Raine received customary compensation. Raine is not entitled to receive any further compensation pursuant to such engagement in connection with the completion of the merger transactions. Entities affiliated with SoftBank beneficially own a minority interest in Raine, and affiliates of SoftBank and Raine are investors in investment funds managed by Raine and SoftBank, respectively. Raine may currently be providing and may, in the future, provide other investment banking, financial advisory or other services to Sprint, T-Mobile, SoftBank, Deutsche Telekom or their respective affiliates, for which Raine would expect to receive compensation.
Pursuant to an engagement letter dated April 3, 2017, Sprint retained J.P. Morgan as its financial advisor in connection with the merger.
At the meeting of the Sprint board of directors on April 29, 2018, J.P. Morgan rendered its oral opinion to the Sprint board of directors to the effect that, as of such date, based upon and subject to the assumptions, limitations, qualifications, conditions and other matters set forth in its opinion, the exchange ratio in the merger was fair, from a financial point of view, to the holders of Sprint common stock as of immediately prior to the HoldCo mergers. J.P. Morgan has confirmed its oral opinion by delivering its written opinion to the Sprint board of directors, dated April 29, 2018, to the effect that, as of such date, the exchange ratio in the merger was fair, from a financial point of view, to the holders of Sprint common stock as of immediately prior to the HoldCo mergers.
The full text of the written opinion of J.P. Morgan, dated as of April 29, 2018, which sets forth the assumptions made, matters considered and limitations and qualifications on the review undertaken, is
attached as Annex L to this joint consent solicitation statement/prospectus and is incorporated herein by reference. The summary of the opinion of J.P. Morgan set forth in this joint consent solicitation statement/prospectus is qualified in its entirety by reference to the full text of such opinion. Sprint stockholders are urged to read the opinion in its entirety. J.P. Morgan’s written opinion was addressed to the Sprint board of directors (in its capacity as such) in connection with and for the purposes of its evaluation of the merger, was directed only to the exchange ratio in the merger and did not address any other aspect of the merger. The issuance of J.P. Morgan’s opinion was approved by a fairness committee of J.P. Morgan. The opinion does not constitute a recommendation to any stockholder of Sprint or T-Mobile as to how such stockholder should vote with respect to the merger or any other matter.
In arriving at its opinion, J.P. Morgan, among other things:
| • | reviewed a draft of the business combination agreement furnished to J.P. Morgan on April 28, 2018 and labeled “Execution Version”; |
| • | reviewed certain publicly available business and financial information concerning Sprint and T-Mobile and the industries in which they operate; |
| • | compared the proposed financial terms of the merger with the publicly available financial terms of certain transactions involving companies J.P. Morgan deemed relevant and the consideration paid for such companies; |
| • | compared the financial and operating performance of Sprint and T-Mobile with publicly available information concerning certain other companies J.P. Morgan deemed relevant and reviewed the current and historical market prices of the Sprint common stock and the T-Mobile common stock and certain publicly traded securities of such other companies; |
| • | reviewed certain internal financial analyses and forecasts prepared by or at the direction of the managements of Sprint and T-Mobile relating to their respective businesses, as well as the estimated amount and timing of the cost savings and related expenses and synergies, including both cost synergies and growth synergies, expected to result from the merger, which were prepared by or at the direction of the managements of Sprint and T-Mobile relating to their respective businesses; and |
| • | performed such other financial studies and analyses and considered such other information as J.P. Morgan deemed appropriate for the purposes of its opinion. |
In addition, J.P. Morgan held discussions with certain members of the management of Sprint and T-Mobile with respect to certain aspects of the merger, and the past and current business operations of Sprint and T-Mobile, the financial condition and future prospects and operations of Sprint and T-Mobile, the effects of the merger on the financial condition and future prospects of Sprint and T-Mobile, and certain other matters J.P. Morgan believed necessary or appropriate to its inquiry.
In giving its opinion, J.P. Morgan relied upon and assumed the accuracy and completeness of all information that was publicly available or was furnished to or discussed with J.P. Morgan by Sprint and T-Mobile or otherwise reviewed by or for J.P. Morgan, and J.P. Morgan did not independently verify any such information or its accuracy or completeness and, pursuant to its engagement letter with the Company, did not assume any obligation to undertake any such independent verification. J.P. Morgan further assumed, for purposes of its financial analysis, that each share of Sprint common stock issued and outstanding immediately prior to the HoldCo mergers, other than any shares of Sprint common stock held directly by Sprint as treasury stock, will be converted into the right to receive a number of shares of T-Mobile common stock equal to the exchange ratio. In addition, at Sprint’s direction, for purposes of its financial analysis, J.P. Morgan disregarded, and did not give any effect to, the occurrence of the HoldCo mergers. J.P. Morgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, nor did J.P. Morgan evaluate the solvency of Sprint or T-Mobile or any other party to the business combination agreement under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to J.P. Morgan or derived
therefrom, including the estimated synergies, J.P. Morgan assumed that they were reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to the expected future results of operations and financial condition of Sprint and T-Mobile to which such analyses or forecasts relate. J.P. Morgan expressed no view as to such analyses or forecasts (including the estimated synergies) or the assumptions on which they were based. J.P. Morgan also assumed that the merger transactions and the other transactions contemplated by the business combination agreement will qualify as a tax-free reorganization for United States federal income tax purposes and otherwise have the tax consequences described in discussions with, and materials furnished to J.P. Morgan by, representatives of Sprint, and will be consummated as described in the business combination agreement, without any modifications to the structure of the merger transactions that would be material to J.P. Morgan’s analysis, and that the definitive business combination agreement would not differ in any material respect from the draft thereof furnished to J.P. Morgan. J.P. Morgan also assumed that the representations and warranties made by Sprint, T-Mobile and the other parties in the business combination agreement and the related agreements were, and will be, true and correct in all respects material to its analysis. J.P. Morgan is not a legal, regulatory or tax expert and relied on the assessments made by advisors to Sprint with respect to such issues. J.P. Morgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the merger transactions will be obtained without any adverse effect on Sprint or T-Mobile or on the contemplated benefits of the merger transactions.
J.P. Morgan’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to J.P. Morgan as of, the date of such opinion. J.P. Morgan’s opinion noted that subsequent developments may affect J.P. Morgan’s opinion and that J.P. Morgan does not have any obligation to update, revise, or reaffirm such opinion. J.P. Morgan’s opinion is limited to the fairness, from a financial point of view, to the holders of Sprint common stock as of immediately prior to the HoldCo mergers of the exchange ratio in the merger. Furthermore, J.P. Morgan expressed no opinion as to the fairness of any consideration to be paid in connection with the merger transactions to the holders of any other class of securities, creditors or other constituencies of Sprint or in connection with any other transaction contemplated by the business combination agreement (including the HoldCo mergers) or as to the underlying decision by Sprint to engage in the merger transactions. J.P. Morgan also did not express any opinion as to the terms of the amended and restated stockholders’ agreement or the proxy agreement or any governance or other rights in either thereof or in the other documentation being entered into in connection with the merger transactions and the other transactions contemplated by the business combination agreement (and did not take any such terms or rights into account in its analysis). J.P. Morgan’s opinion did not take into account the individual circumstances of any holders of Sprint common stock with respect to control, governance or other rights which may distinguish such holders from other holders. Furthermore, J.P. Morgan expressed no opinion with respect to the amount or nature of any compensation to any officers, directors, or employees of any party to the merger transactions, or any class of such persons relative to the exchange ratio applicable to the holders of Sprint common stock in the merger or with respect to the fairness of any such compensation. J.P. Morgan expressed no opinion as to the price at which the Sprint common stock or the T-Mobile common stock will trade at any future time.
The terms of the business combination agreement, including the exchange ratio, were determined through arm’s length negotiations between Sprint and T-Mobile, and the decision to enter into the business combination agreement was solely that of the Sprint board of directors and the T-Mobile board of directors. J.P. Morgan’s opinion and financial analyses were only one of the many factors considered by the Sprint board of directors in its evaluation of the merger and should not be viewed as determinative of the views of the Sprint board of directors or management with respect to the merger or the exchange ratio.
In accordance with customary investment banking practice, J.P. Morgan employed generally accepted valuation methodology in rendering its opinion to the Sprint board of directors on April 29, 2018 and contained in the presentation delivered to the Sprint board of directors on such date in connection with the rendering of such opinion and this summary does not purport to be a complete description of the analyses or data presented by J.P. Morgan. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by
J.P. Morgan, the tables must be read together with the full text of each summary. Considering the data set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of J.P. Morgan’s analyses.
Analysis of Sprint
Selected Public Trading Multiples Analysis
Using publicly available information, J.P. Morgan compared selected financial data of Sprint with similar data for selected publicly traded companies engaged in businesses which J.P. Morgan judged to be sufficiently analogous to Sprint. The companies selected by J.P. Morgan were as follows:
| • | AT&T Inc. |
| • | T-Mobile |
| • | United States Cellular Corporation |
| • | Verizon Communications Inc. |
These companies were selected, among other reasons, because they are publicly traded companies with operations and businesses that, for purposes of J.P. Morgan’s analysis, may be considered similar in certain respects to those of Sprint based on business sector participation, financial metrics and form of operations. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies differently than would affect Sprint.
J.P. Morgan calculated and compared firm value (calculated as the market value of the relevant company’s common stock on a fully diluted basis, plus any debt and minority interest, less cash and cash equivalents) (1) for Sprint and each company listed above, as a multiple of estimated earnings before interest, taxes, depreciation and amortization but after stock-based compensation expense (which we refer to in this section entitled “—Opinion of J.P. Morgan” as “EBITDA”) for calendar year 2018 (which we refer to in this section entitled “—Opinion of J.P. Morgan” as “FV / 2018E EBITDA”) and (2) for Sprint and T-Mobile, as a multiple of estimated EBITDA minus depreciation expense associated with leased handsets (which we refer to in this section entitled “—Opinion of J.P. Morgan” as “adjusted cash EBITDA”) for calendar year 2018 (which we refer to in this section entitled “—Opinion of J.P. Morgan” as “FV / 2018E adjusted cash EBITDA”), in each case, based on public filings with the SEC, equity analyst research reports, FactSet market prices and other publicly available information as of April 27, 2018 for each company listed above other than Sprint and T-Mobile, the publicly available information with respect to which was as of April 9, 2018, the last complete trading day before The Wall Street Journal reported on April 10, 2018 that T-Mobile and Sprint had recommenced negotiations regarding a possible business combination transaction.
In addition, with respect to Sprint, J.P. Morgan calculated and compared both the FV / 2018 EBITDA and the FV / 2018E adjusted cash EBITDA based on the Sprint management Sprint forecasts and the adjusted Sprint management Sprint forecasts, each of which was furnished to J.P. Morgan by Sprint management for use by J.P. Morgan in connection with its financial analyses and in rendering its fairness opinion. With respect to T-Mobile, J.P. Morgan also calculated and compared both the FV / 2018 EBITDA and the FV / 2018E adjusted cash EBITDA based on the T-Mobile management T-Mobile forecasts, which were furnished to J.P. Morgan by T-Mobile management and reviewed and approved by Sprint management for use by J.P. Morgan in connection with its financial analyses and in rendering its fairness opinion.
Results of the analysis were presented for the selected companies and Sprint, as indicated in the following table:
| FV/2018E EBITDA |
||||
| AT&T Inc.(1) |
6.2x | |||
| Sprint |
||||
| Sprint Wall Street Consensus Estimates(1) |
4.6x | |||
| Sprint Management Sprint Forecasts |
4.5x | |||
| Adjusted Sprint Management Sprint Forecasts |
4.5x | |||
| T-Mobile |
||||
| T-Mobile Wall Street Consensus Estimates(1) |
7.1x | |||
| T-Mobile Management T-Mobile Forecasts |
7.5x | |||
| United States Cellular Corporation(1) |
5.7x | |||
| Verizon Communications Inc.(1) |
7.2x | |||
| FV/2018E Adj. Cash EBITDA |
||||
| Sprint |
||||
| Sprint Wall Street Consensus Estimates(1) |
7.3x | |||
| Sprint Management Sprint Forecasts |
7.5x | |||
| Adjusted Sprint Management Sprint Forecasts |
7.5x | |||
| T-Mobile |
||||
| T-Mobile Wall Street Consensus Estimates(1) |
7.5x | |||
| T-Mobile Management T-Mobile Forecasts |
7.9x | |||
| (1) | For reference only. |
J.P. Morgan did not rely solely on the quantitative results of the selected multiples analysis in developing reference ranges or otherwise applying its analysis. To that end, based on J.P. Morgan’s professional judgment (including judgments concerning the relative comparability of each of the selected companies to Sprint), J.P. Morgan determined to present its analysis with respect to each of AT&T, United States Cellular Corporation and Verizon for reference only and not as a component of its fairness analysis. Based on the results of its analysis, the foregoing determination and J.P. Morgan’s professional judgment, as well as its experience with the industry in which Sprint participates, J.P. Morgan selected as the relevant metric FV / 2018E adjusted cash EBITDA and selected a relevant multiple reference range of 7.25x to 7.50x.
After applying the selected valuation range to the adjusted cash EBITDA projections for Sprint for calendar year 2018 included in each of the Sprint management Sprint forecasts and the adjusted Sprint management Sprint forecasts, the analysis indicated the following ranges of implied equity value per share for the Sprint common stock (rounded to the nearest $0.10):
| Sprint Management Sprint Forecasts |
Adjusted Sprint Management Sprint Forecasts | |||
| Sprint Implied Equity Value Per Share |
$4.80 – $5.30 | $4.80 – $5.30 |
The ranges of implied equity value per share for the Sprint common stock were compared to (1) the closing trading price per share of Sprint common stock of $6.50 as of April 27, 2018, (2) the unaffected closing trading price per share of Sprint common stock of $5.14 on April 9, 2018, and (3) the implied value of the merger consideration of $6.13 per share based on the exchange ratio of 0.10256 per share pursuant to the business combination agreement and the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Discounted Cash Flow Analysis
J.P. Morgan conducted a discounted cash flow analysis for the purpose of determining an implied fully diluted equity value per share for the Sprint common stock.
A discounted cash flow analysis is a method of evaluating an asset using estimates of the future unlevered free cash flows generated by the asset, and taking into consideration the time value of money with respect to those future cash flows by calculating their “present value.” The “unlevered free cash flows” refers to a calculation of the future cash flows generated by an asset without including in such calculation any debt servicing costs. “Present value” refers to the current value of the future cash flows generated by the asset, and is obtained by discounting those cash flows back to the present using a discount rate that takes into account macroeconomic assumptions and estimates of risk, the cost of capital and other appropriate factors. “Terminal value” refers to the present value of all future cash flows generated by the asset for periods beyond the projections period.
J.P. Morgan calculated the present value of unlevered free cash flows for Sprint for the calendar years 2018 through 2022 using unlevered free cash flows that were based on the Sprint management Sprint forecasts for such calendar years and the adjusted Sprint management Sprint forecasts for such calendar years and were reviewed and approved by Sprint management for use by J.P. Morgan in connection with its financial analyses and in rendering its fairness opinion. J.P. Morgan also calculated a range of terminal values for Sprint at December 31, 2022 by applying, based on assumptions provided by the management of Sprint, a terminal growth rate ranging from 0.00% to 1.00% to the unlevered free cash flows of Sprint for calendar year 2022, which were adjusted by the management of Sprint to create a normalized period as the starting point for the application of the terminal growth rate. The unlevered free cash flows and the range of terminal values were then discounted to present values using a range of discount rates from 6.50% to 7.50%. The discount rate range was selected by J.P. Morgan based on J.P. Morgan’s analysis of the weighted average cost of capital for Sprint. These present values, when added together, resulted in an implied firm value for Sprint. To calculate an estimated equity value per share of Sprint common stock, J.P. Morgan then adjusted the implied firm value for cash, debt and minority interest value of Sprint as of March 31, 2018 and, at the direction of the management of Sprint, to include the present value, calculated using the same range of discount rates, of certain net operating losses (which we refer to in this section entitled “—Opinion of J.P. Morgan” as the “NOLs”) that are expected to be utilized to offset future taxable income in accordance with an NOL utilization schedule prepared by the management of Sprint, which present value was approximately $4.4 billion under both the Sprint management Sprint forecasts and the adjusted Sprint management Sprint forecasts, in each case, using a 7.00% discount rate. The resulting implied equity value was then divided by the fully diluted number of shares of Sprint common stock outstanding as of April 25, 2018.
This analysis indicated the following ranges of implied equity value per share for the Sprint common stock (rounded to the nearest $0.10).
| Sprint Management Sprint Forecasts |
Adjusted Sprint Management Sprint Forecasts | |||
| Sprint Implied Equity Value Per Share |
$7.60 – $12.80 | $3.30 – $7.20 |
The ranges of implied equity values per share for the Sprint common stock were compared to (1) the closing trading price per share of Sprint common stock of $6.50 as of April 27, 2018, (2) the unaffected closing trading price per share of Sprint common stock of $5.14 on April 9, 2018, and (3) the implied value of the merger consideration of $6.13 per share based on the exchange ratio of 0.10256 per share pursuant to the business combination agreement and the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Selected Transaction Analysis
Using publicly available information, J.P. Morgan examined selected transactions with respect to selected companies engaged in businesses which J.P. Morgan judged to be analogous to the business of Sprint or aspects
thereof. Using publicly available estimates, J.P. Morgan reviewed the firm values implied by the selected transactions (each of which is listed in the following table) as a multiple of the target company’s EBITDA for the 12-month period immediately preceding the announcement of the transaction (which we refer to in this section entitled “—Opinion of J.P. Morgan” as “LTM EBITDA”), as set forth below:
| Announcement Date |
Target |
Acquirer | ||
| June 5, 2008 | Alltel Corporation | Verizon Communications Inc. | ||
| November 7, 2008 | Centennial Communications Corp. | AT&T Inc. | ||
| March 20, 2011 | T-Mobile | AT&T Inc.(1) | ||
| April 15, 2013 | MetroPCS Communications, Inc. | T-Mobile | ||
| June 10, 2013 | Sprint | SoftBank | ||
| July 12, 2013 | Leap Wireless International, Inc. | AT&T Inc. | ||
| September 2, 2013 | Vodafone Group plc | Verizon Communications Inc. |
| (1) | This transaction was not completed. |
This analysis indicated a range of LTM EBITDA multiples of 5.5x to 9.4x, with the median for such multiples at 7.5x. J.P. Morgan did not rely solely on the quantitative results of the selected transaction analysis in developing reference ranges or otherwise applying its analysis. Based on various judgments concerning relative comparability of each of the companies in the selected transactions to Sprint and each of the selected transactions to the merger, as well as its experience with mergers and acquisitions and the industry in which Sprint and T-Mobile participate, J.P. Morgan selected a range of LTM EBITDA multiples that it believed reflected an appropriate range of multiples applicable to Sprint.
Based on the results of this analysis, and other factors that J.P. Morgan considered appropriate, J.P. Morgan applied an LTM EBITDA multiple range of 7.5x to 9.5x to Sprint’s adjusted cash EBITDA for the 12-month period ending March 31, 2018.
This analysis indicated the following range of implied equity value per share for Sprint common stock (rounded to the nearest $0.10).
| Sprint Implied Equity Value Per Share |
||||
| Low |
High |
|||
| $5.50 |
$8.90 | |||
The range of implied equity value per share for the Sprint common stock was compared to (1) the closing trading price per share of Sprint common stock of $6.50 as of April 27, 2018, (2) the unaffected closing trading price per share of Sprint common stock of $5.14 on April 9, 2018, and (3) the implied value of the merger consideration of $6.13 per share based on the exchange ratio of 0.10256 per share pursuant to the business combination agreement and the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Other Information
Historical Trading Range
For reference only, and not as a component of its fairness analysis, J.P. Morgan reviewed the trading range for the Sprint common stock for the 52-week period ending on April 9, 2018, which was $4.81 per share to $9.22 per share, and compared that to (1) the closing trading price per share of Sprint common stock of $6.50 as of April 27, 2018, (2) the unaffected closing trading price per share of Sprint common stock of $5.14 on April 9, 2018, and (3) the implied value of the merger consideration of $6.13 per share based on the exchange ratio of 0.10256 per share pursuant to the business combination agreement and the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Analyst Price Targets
For reference only, and not as a component of its fairness analysis, J.P. Morgan reviewed certain publicly available equity research analyst share price targets for the Sprint common stock and noted that the range of such price targets was $2.00 per share to $7.50 per share, with the median for such price targets at $5.75 per share, and compared that to (1) the closing trading price per share of Sprint common stock of $6.50 as of April 27, 2018, (2) the unaffected closing trading price per share of Sprint common stock of $5.14 on April 9, 2018, and (3) the implied value of the merger consideration of $6.13 per share based on the exchange ratio pursuant to the business combination agreement and the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Analysis of T-Mobile
Selected Public Trading Multiples Analysis
Using publicly available information, J.P. Morgan compared selected financial data of T-Mobile with similar data for selected publicly traded companies engaged in businesses which J.P. Morgan judged to be sufficiently analogous to T-Mobile. The companies selected by J.P. Morgan were as follows:
| • | AT&T Inc. |
| • | Sprint |
| • | United States Cellular Corporation |
| • | Verizon Communications Inc. |
These companies were selected, among other reasons, because they are publicly traded companies with operations and businesses that, for purposes of J.P. Morgan’s analysis, may be considered similar in certain respects to those of T-Mobile based on business sector participation, financial metrics and form of operations. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies differently than would affect T-Mobile.
J.P. Morgan calculated and compared firm value (1) for T-Mobile and each company listed above, as a multiple of estimated EBITDA for calendar year 2018 and (2) for T-Mobile and Sprint, as a multiple of estimated adjusted cash EBITDA for calendar year 2018, in each case, based on public filings with the SEC, equity analyst research reports, FactSet market prices and other publicly available information as of April 27, 2018 for each company listed above other than Sprint and T-Mobile, the publicly available information with respect to which was as of April 9, 2018.
In addition, with respect to T-Mobile, J.P. Morgan calculated and compared both the FV / 2018 EBITDA and the FV / 2018E adjusted cash EBITDA based on the T-Mobile management T-Mobile forecasts. With respect to Sprint, J.P. Morgan also calculated and compared both the FV / 2018 EBITDA and the FV / 2018E adjusted cash EBITDA based on the Sprint management Sprint forecasts and the adjusted Sprint management Sprint forecasts.
Results of the analysis were presented for the selected companies and T-Mobile, as indicated in the following table:
| FV/2018E EBITDA |
||||
| AT&T Inc.(1) |
6.2x | |||
| Sprint |
||||
| Sprint Wall Street Consensus Estimates(1) |
4.6x | |||
| Sprint Management Sprint Forecasts |
4.5x | |||
| Adjusted Sprint Management Sprint Forecasts |
4.5x | |||
| T-Mobile |
||||
| T-Mobile Wall Street Consensus Estimates(1) |
7.1x | |||
| T-Mobile Management T-Mobile Forecasts |
7.5x | |||
| United States Cellular Corporation(1) |
5.7x | |||
| Verizon Communications Inc.(1) |
7.2x | |||
| FV/2018E Adj. Cash EBITDA |
||||
| Sprint |
||||
| Sprint Wall Street Consensus Estimates(1) |
7.3x | |||
| Sprint Management Sprint Forecasts |
7.5x | |||
| Adjusted Sprint Management Sprint Forecasts |
7.5x | |||
| T-Mobile |
||||
| T-Mobile Wall Street Consensus Estimates(1) |
7.5x | |||
| T-Mobile Management T-Mobile Forecasts |
7.9x | |||
| (1) | For reference only. |
J.P. Morgan did not rely solely on the quantitative results of the selected multiples analysis in developing reference ranges or otherwise applying its analysis. To that end, based on J.P. Morgan’s professional judgment (including judgments concerning the relative comparability of each of the selected companies to T-Mobile), J.P. Morgan determined to present its analysis with respect to each of AT&T, United States Cellular Corporation and Verizon for reference only and not as a component of its fairness analysis. Based on the results of its analysis, the foregoing determination and J.P. Morgan’s professional judgment, as well as its experience with the industry in which T-Mobile participates, J.P. Morgan selected as the relevant metric FV / 2018E adjusted cash EBITDA and selected a relevant multiple reference range of 7.25x to 7.50x.
After applying the selected valuation range to the adjusted cash EBITDA projections for T-Mobile for calendar year 2018 included in the T-Mobile management T-Mobile forecasts, the analysis indicated the following range of implied equity value per share for the T-Mobile common stock (rounded to the nearest $0.10):
|
T-Mobile Implied Equity Value Per Share |
||||
| Low |
High |
|||
| $52.00 |
$55.00 | |||
The range of implied equity value per share for the T-Mobile common stock was compared to (1) the closing trading price per share of T-Mobile common stock of $64.52 as of April 27, 2018 and (2) the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Discounted Cash Flow Analysis
J.P. Morgan conducted a discounted cash flow analysis for the purpose of determining an implied fully diluted equity value per share for the T-Mobile common stock.
J.P. Morgan calculated the present value of unlevered free cash flows for T-Mobile for the calendar years 2018 through 2022 using unlevered free cash flows that were based on the T-Mobile management T-Mobile forecasts for such calendar years and were reviewed and approved by Sprint management for use by J.P. Morgan in connection with its financial analyses and in rendering its fairness opinion. J.P. Morgan also calculated a range of terminal values for T-Mobile at December 31, 2022 by applying, based on assumptions provided by the management of Sprint, a terminal growth rate ranging from 0.00% to 1.00% to the unlevered free cash flows of T-Mobile for calendar year 2022, which were adjusted by the management of Sprint to create a normalized period as the starting point for the application of the terminal growth rate. The unlevered free cash flows and the range of terminal values were then discounted to present values using a range of discount rates from 6.50% to 7.50%. The discount rate range was selected by J.P. Morgan based on J.P. Morgan’s analysis of the weighted average cost of capital for T-Mobile. These present values, when added together, resulted in an implied firm value for T-Mobile. To calculate an estimated equity value per share of T-Mobile common stock, J.P. Morgan then adjusted the implied firm value for cash, debt and minority interest value of T-Mobile as of March 31, 2018 and, at the direction of the management of Sprint, to include the present value, calculated using the same range of discount rates, of certain NOLs that are expected to be utilized to offset future taxable income in accordance with an NOL utilization schedule prepared by the management of T-Mobile, which present value was approximately $1.3 billion using a 7.00% discount rate. The resulting implied equity value was then divided by the fully diluted number of shares of T-Mobile common stock outstanding as of April 25, 2018.
This analysis indicated the following range of implied equity value per share for T-Mobile common stock (rounded to the nearest $0.10).
|
T-Mobile Implied Equity Value Per Share |
||||
| Low |
High |
|||
| $46.10 |
$72.30 | |||
The range of implied equity value per share for the T-Mobile common stock was compared to (1) the closing trading price per share of T-Mobile common stock of $64.52 as of April 27, 2018 and (2) the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Other Information
Historical Trading Range
For reference only, and not as a component of its fairness analysis, J.P. Morgan reviewed the trading range for the T-Mobile common stock for the 52-week period ending on April 9, 2018, which was $54.60 per share to $68.88 per share, and compared that to (1) the closing trading price per share of T-Mobile common stock of $64.52 as of April 27, 2018 and (2) the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Analyst Price Targets
For reference only, and not as a component of its fairness analysis, J.P. Morgan also reviewed certain publicly available equity research analyst share price targets for the T-Mobile common stock and noted that the range of such price targets was $65.00 per share to $82.00 per share, with the median for such price targets at $75.00 per share, and compared that to (1) the closing trading price per share of T-Mobile common stock of $64.52 as of April 27, 2018 and (2) the unaffected closing trading price per share of T-Mobile common stock of $59.74 on April 9, 2018.
Relative Value Analysis
Based on the implied equity values per share for Sprint and T-Mobile calculated above in “—Analysis of Sprint—Public Trading Multiples Analysis,” “—Analysis of Sprint—Discounted Cash Flow Analysis,”
“—Analysis of T-Mobile—Public Trading Multiples Analysis” and “—Analysis of T-Mobile—Discounted Cash Flow Analysis,” J.P. Morgan calculated a range of implied exchange ratios based on a comparison of a share of Sprint common stock to a share of T-Mobile common stock, as shown in the table below. For each comparison, J.P. Morgan divided the highest equity value per share for Sprint by the lowest equity value per share for T-Mobile to derive the highest exchange ratio implied by each set of reference ranges. J.P. Morgan also divided the lowest equity value per share for Sprint by the highest equity value per share for T-Mobile to derive the lowest exchange ratio implied by each set of reference ranges. The implied exchange ratios resulting from J.P. Morgan’s analysis were:
| Range of Implied Exchange Ratios |
||||||||
| Low | High | |||||||
| Public Trading Multiples Analysis |
||||||||
| Sprint Management Sprint Forecasts |
0.0878x | 0.1013x | ||||||
| Adjusted Sprint Management Sprint Forecasts |
0.0878x | 0.1013x | ||||||
| Discounted Cash Flow Analysis |
||||||||
| Sprint Management Sprint Forecasts |
0.1053x | 0.2787x | ||||||
| Adjusted Sprint Management Sprint Forecasts |
0.0463x | 0.1567x | ||||||
The implied exchange ratios for Sprint and T-Mobile were compared to the exchange ratio of 0.10256 per share of T-Mobile common stock for a share of Sprint common stock pursuant to the business combination agreement.
Intrinsic Value Creation Analysis
J.P. Morgan conducted an implied intrinsic value creation analysis, based on the Sprint management Sprint forecasts and the T-Mobile management T-Mobile forecasts, that compared the implied equity value of Sprint common stock and T-Mobile common stock derived from a discounted cash flow valuation on a standalone basis to the pro forma combined company implied equity value, taking into account the estimated synergies. J.P. Morgan determined the pro forma combined company implied equity value by calculating the sum of (1) the implied equity values of the Sprint common stock and the T-Mobile common stock using the midpoint values determined pursuant to J.P. Morgan’s discounted cash flow analyses described above, (2) the estimated present value of approximately $53.0 billion of the cost synergies included in the estimated synergies, net of any related costs to achieve such cost synergies, which were discounted to present value using a 7.00% discount rate and a 0.50% terminal growth rate, net of estimated transaction expenses, which cost synergies, related costs and transaction expenses were furnished to J.P. Morgan by Sprint management, and (3) the estimated present value of approximately $7.9 billion of the growth synergies included in the estimated synergies, net of any related costs to achieve such growth synergies, which were discounted to present value using a 7.00% discount rate and a 0.50% terminal growth rate, which growth synergies and related costs were furnished to J.P. Morgan by Sprint management. J.P. Morgan determined the implied value to the holders of Sprint common stock by multiplying the pro forma equity value of the combined company by the pro forma equity ownership percentage of the combined company attributable to the existing holders of Sprint common stock pursuant to the merger. The analysis indicated that the merger created hypothetical incremental implied value to the holders of Sprint common stock, both with and without taking into account the growth synergies.
J.P. Morgan also conducted an implied value creation analysis based on the adjusted Sprint management Sprint forecasts and the T-Mobile management T-Mobile forecasts. J.P. Morgan determined the pro forma combined company implied equity value by performing the same analysis described in the immediately preceding paragraph with respect to the adjusted Sprint management Sprint forecasts in lieu of the Sprint management Sprint forecasts. The analysis indicated that the merger created hypothetical incremental implied value for the holders of Sprint common stock, both with and without taking into account the growth synergies.
Miscellaneous
The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by J.P. Morgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. J.P. Morgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described above were merely utilized to create points of reference for analytical purposes and should not be taken to be the view of J.P. Morgan with respect to the actual value of Sprint or T-Mobile. The order of analyses described does not represent the relative importance or weight given to those analyses by J.P. Morgan. In arriving at its opinion, J.P. Morgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, J.P. Morgan considered the totality of the factors and analyses performed in determining its opinion.
Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by J.P. Morgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, J.P. Morgan’s analyses are not, and do not purport to be, appraisals or otherwise reflective of the prices at which businesses actually could be acquired or sold. None of the selected companies reviewed as described in the above summary is identical to Sprint or T-Mobile, and none of the selected transactions reviewed was identical to the merger. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of J.P. Morgan’s analysis, may be considered similar to those of Sprint and T-Mobile. The transactions selected were similarly chosen because their participants, size and other factors, for purposes of J.P. Morgan’s analysis, may be considered similar to the merger. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to Sprint and T-Mobile and the transactions compared to the merger.
As a part of its investment banking business, J.P. Morgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. J.P. Morgan was selected to advise Sprint with respect to the merger on the basis of, among other things, such experience and its qualifications and reputation in connection with such matters and its familiarity with Sprint, T-Mobile and the industries in which they operate.
For services rendered in connection with the merger (including the delivery of its opinion), Sprint agreed to pay J.P. Morgan certain fees, which are payable in installments as follows: (1) $5 million, which became payable to J.P. Morgan upon the delivery of its fairness opinion, and (2) $10 million, which is payable to J.P. Morgan upon the consummation of the merger. J.P. Morgan may also receive a fee from Sprint in the event that Sprint receives a termination fee in connection with the termination of the business combination agreement and abandonment of the merger. In addition, Sprint has agreed to reimburse J.P. Morgan for its expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities arising out of J.P. Morgan’s engagement.
During the two years preceding the date of J.P. Morgan’s opinion, J.P. Morgan and its affiliates have had commercial or investment banking relationships with Sprint, T-Mobile and their respective ultimate parent companies, SoftBank and Deutsche Telekom, and each of their respective affiliates, for which J.P. Morgan and its affiliates have received or may receive customary compensation. Such services during such period have included acting as joint bookrunner on Sprint’s offering of debt securities in October 2016, February 2018 and March 2018; as joint lead arranger and bookrunner on Sprint’s credit facility in February 2017 and September
