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Ways to Profit From a T-Mobile Merger or Takeover

NEW YORK (TheStreet) -- Each time a larger telecom tries to take control of T-Mobile US (TMUS - Get Report) there's money to be made for the company, its majority owner and, indirectly, for shareholders.

That's because Deutsche Telekom (DTEGY), the German company that owns 67% of T-Mobile, is a keen negotiator. With such a large stake in T-Mobile, Deutsche Telekom uses its clout to offset any potential damage to TMUS shares if an acquisition attempt fails, no matter what the reasons.

In 2011, the year before its investment in T-Mobile, Deutsche Telekom watched AT&T (T) attempt to buy T-Mobile for nearly $40 billion. That deal collapsed when the U.S. Justice Department ruled against it.

The thwarted takeover still paid off for T-Mobile. The company had negotiated a $3 billion remuneration if the deal wasn't approved, and that's how much it pocketed in the end. TMUS currently trades near $33, down 2% for the year to date.

The latest suitor appears to be Sprint (S) whose majority owner is Japanese conglomerate SoftBank (SFTBY). Again, the highest hurdle for any deal are the U.S. regulators, especially the Federal Communications Commission. In April the FCC reaffirmed its stance that it wants four wireless telecoms competing in the U.S. to provide sufficient consumer choices.

Knowing this, Deutsch Telekom is demanding over $1 billion from Sprint if a merger or acquisition fails. The demand includes assurances that the T-Mobile brand and parts of its management would survive after any deal with Sprint. This may appease the FCC, which meets on Thursday when it's expected to vote on a change in the rules governing the amount of spectrum carriers can control.

So how does a prudent investor capitalize on the situation?

One way is to buy shares of each of the publicly traded entities involved. Of the three, T-Mobile, Sprint and Deutsch Telekom, only the latter pays a dividend with a yield of about 3.8%.

My favorite way to "cash in" would be to sell a put option on T-Mobile if the Sprint offer fails and the stock price tumbles. I may also buy a long-term call option once shares begin to recover.

The following five-year chart of T-Mobile shows how the stock's price performed through each attempted acquisition. As you can see, this is not a stock for those with queasy stomachs.

TMUS Chart
TMUS
data by YCharts

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