The case against buying Sprint Nextel

Shares of Sprint Nextel rallied after the British newspaper said Deutsche Telekom may submit an offer "within the next few weeks." If a bid comes in and the merger goes through, the combined company would have as many as 82.3 million subscribers, and may become the No. 2 player in the U.S. wireless market, behind Verizon Wireless and ahead of AT&T. By banding together, Sprint Nextel and T-Mobile USA may find it easier to defend themselves against rivals.

 

Yet, there are a lot of ifs related to this potential deal, and the optimism lifting Sprint stock may be premature. Analysts question whether Deutsche Telekom can swing the purchase financially, regulators may not give their assent to a deal, and the two companies operate incompatible technologies that would make integrating operations a bear. "It would be a tough road" to travel, says Charles Golvin, a principal analyst at consultant Forrester Research.

Although Sprint has become cheaper in recent years amid dimming financial prospects, Deutsche Telekom may still struggle to finance the purchase. Sprint Nextel may hold out for as much as $5.50 a share, or $15.84 billion, says Michael Nelson, an analyst at Nelson Alpha Research. But in an effort to avoid overextending itself, Deutsche Telekom may not be able raise more than $14.6 billion, says Phil Cusick, an analyst at Macquarie Research. On Sept. 14, Sprint Nextel stock jumped 10%, to 4.15, while Deutsche Telekom slipped 1.15% in Germany (its ADRs on the New York Stock Exchange slipped 8¢, or 0.58%, to 13.79).

 

Deutsche Telekom's decision to merge its British division, T-Mobile U.K., with the local affiliate of Orange in early September fueled speculation a similar overhaul may be in the offing in the U.S.

 

But U.S. antitrust regulators may not quickly green-light a merger. The U.S. wireless industry is already highly concentrated, with two players—Verizon Wireless and AT&T—controlling 62% of all wireless subscribers. Together, Sprint Nextel and T-Mobile would have about 30% of the total. From 1996 to 2005, the Federal Trade Commission blocked 16 of 20 mergers in cases where industry concentration was at comparable levels, Craig Moffett, a senior Sanford C. Bernstein analyst, wrote in a Sept. 14 report.

Spin-offs may be required
To win approval, the companies may be forced to make concessions, such as selling or spinning off operations that cater to as many as 12 million subscribers, Nelson estimates. As a foreign acquirer, Deutsche Telekom would also be subject to an exacting review by the Committee on Foreign Investment in the U.S., which examines foreign purchases to ensure they don't diminish national security.

 

Then there's the matter of combining the two companies' incompatible networks. The two companies use a total of three different incompatible wireless technologies and T-Mobile has been a laggard in migrating to so-called 3G wireless technology, capable of helping users download information from the Web at higher speeds. Getting both companies on the same technological page would make it harder to achieve hoped-for cost benefits of a deal.

 

There's little doubt that the companies need avenues for growth. In the quarter that ended June 30, Sprint lost 257,000 subscribers and $384 million. While it's still adding subscribers, T-Mobile's user growth has slowed significantly and sales for the June quarter declined 2.3%, to $5.34 billion. "Our mobile communications business in the USA generates a mixed picture," Deutsche Telekom CEO René Obermann said at a conference in August.

 

Too bad a combination with Sprint may do little to make the picture clearer.