The case against buying Sprint Nextel

Olga Kharif and Jack Ewing
16 Sep 2009

In the past couple of years it's gotten easy to take rampant rumors of a Sprint Nextel takeover with a grain of salt. That wasn't the case on Sept. 12, when the London Telegraph reported that Deutsche Telekom is considering a multibillion-dollar bid for the troubled U.S. wireless service provider.

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.

FTC could block deal

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.

Related content

No Comments Yet! Be the first to share what you think!