Rumors Swirl Around a Sprint and Deutsche Telecom Tie-Up

“In corporate headlines this morning, a report out of London that Deutsche Telecom is considering a bid for Sprint Nextel. Higher in early European trading, that’s a huge percentage move because it’s a $3 stock. Deutsche Telecom has called in bankers and could submit a bid for Sprint within the next few weeks.” — CNBC’s Squawk Box 9/14/2009

Speculation surrounding these two companies merging has been around for years, and those rumors gained strength again today sending Sprint (NYSE:S) stock up more than 11%. Ever since the top-tier carriers Verizon and AT&T first started to distance themselves, there has been speculation that a combination of the smaller two rivals may be inevitable. Sprint Nextel is a distant third in terms of market share for U.S. cell phone carriers and consistently has one of the industries worst churn rates. Deutsche Telekom (NYSE:DT), the parent company for T-Mobile, has the fourth largest presence in the U.S. Were the two carriers to commit to merging, they would claim about 70 million customers placing them much nearer to Verizon’s (NYSE:VZ) 80 million and AT&T’s (NYSE:T) 78 million.

The London Telegraph is reporting that Deutsche Telekom has retained bankers to investigate the deal, which the paper says could be forthcoming in the next few weeks. We wrote about the potential of this deal back in May of 2008 (Deutsche Telekom and Sprint: A Good Fit?). Our understanding of the deal has really not changed all that much. Deutsche Telekom would be acquiring a large portion of the U.S. wireless market share for what may turn out to be a good price, but the merger would be extremely complex.

First, as far as valuation goes, we think Sprint’s stock is very cheap right now with a market value of around $12 billion, but an acquisition would also have to assume Sprint’s more than $19 billion in debt. This may prove a heavy price to pay for a company that has lost so much ground to competitors over the past few years. There would need to be substantial cost efficiencies in order to make that kind of debt appealing.

Further complicating this deal is the fact that the two companies are built on different network technologies, and they are investing in separate 4G network technologies at the moment. Sprint knows how complex integrating two existing networks can be based on its experience from buying Nextel. Eventually, they gave up integrating the networks in favor of sticking with and building on Sprint’s existing network. The question for DT is whether such a combination will be worth the expense and the time. If a merger and integration were to not go smoothly, there could be a risk of loosing customers jilted by bad service.

Speculation has surrounded these two firms for years, and there has been a reason why they have not merged up until now. Sprint has worked towards reducing their debt load since the last time we wrote about this and the share price is lower as well. The U.S. cell phone carrier market is pretty mature and organic growth may be tough to come by in the years ahead. Perhaps it has finally become worth the trouble for DT to make the plunge, and buy Sprint.

Rumors Swirl Around a Sprint and Deutsche Telecom Tie-Up

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