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) 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


If you think T-Mobile shares are going higher but you're squeamish about exposure to the stock, consider an exchange-traded fund like the iShares U.S. Telecommunications ETF (IYZ). Shares of TMUS comprise about 5% of the ET, which pays a dividend yield of about 2.7%.

Another way to speculate with T-Mobile is by using a TMUS call option spread expiring in January 2015. Buying a call with a lower strike price and simultaneously selling a call at a higher strike price lowers the cost but still offers the chance to make a profit. For example you could buy the January 2015 call with a strike price of $32 and sell a call with the same expiration with a $40 strike price. Talk to an options specialist at your brokerage firm to learn more.

Stay tuned for the FCC's upcoming rulings, which will impact upon all the major wireless U.S.carriers. Also look for announcements about the continuing saga of who controls T-Mobile's future. I anticipate a potential bidding battle to unfold, so the investment theme is likely to get more interesting for all involved.

At the time of publication the author had positions in TMUS and T.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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>>Read more: How to Read an AT&T and DirecTV Merger

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

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