Rumors of Sprint Nextel Corp. (S) being in talks with the German company Deutsche Telekom to buy the latter’s T-Mobile USA unit have re-surfaced. The market buzz won positive reactions from investors, resulting in a 22 cent jump in Sprint shares at last close.
Both Sprint and Deutsche Telekom are struggling in the US mobile market to compete against two dominant players Verizon Wireless and AT&T Inc. (T). Verizon Wireless is a joint venture of Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD). We believe the combination of Sprint and T-Mobile, the third and fourth largest U.S. wireless providers, respectively, will create an entity, much stronger than these standalone companies.
As per market sources, the German company will own a 50% stake in the combined company. The current value of T-Mobile and Sprint are estimated at $15–$20 billion and $13.6 billion, respectively. However, the deal between the two companies is unlikely in the near term as T-Mobile has not agreed to its valuation.
Integration challenges are also likely as both Sprint and T-Mobile use different wireless technologies in their mobile networks. While Sprint uses the CDMA wireless technology for its widespread 3G service, T-Mobile uses GSM technology.
If they merge, the new company will run separate networks at a higher cost than its rivals. Such a situation would remind us of Sprint’s integration problems with Nextel, following their merger in 2005. This deal had put two different networks under one umbrella that resutled in a higher operating cost. Sprint shares have lost more than 80% of their value since the announcement of the merger in December 2004.
Currently, 4G services are booming in the U.S. wireless market. So, we believe the 3G technology is less an issue for the combined company as both Sprint and T-Mobile have started to move to the 4G network.
Sprint intends to complete the deployment of the 4G network based on Long Term Evolution technology in its entire coverage by year-end 2013. The company’s 4G services cover 71 markets in the U.S. and reached 120 million people at year-end 2010. On the other hand, T-Mobile uses the HSPA+ 4G network, which covers 200 million people in 100 major metropolitan areas at year-end 2010.
We are currently maintaining our long-term Neutral rating on Sprint supported by the Zacks #3 (Hold) Rank.