Sprint in M&A play, shares surge

NEW YORK Mon May 5, 2008 10:05pm EDT

NEW YORK (Reuters) - Reports of a possible sale of Sprint Nextel Corp (S.N) to Deutsche Telekom AG (DTEGn.DE) or a Nextel unit spinoff raised hopes of a reprieve for the embattled mobile operator, lifting its shares 10 percent.

But analysts said such deals would be difficult. A Deutsche Telekom deal would require integrating incompatible networks and face a tough antitrust review and a Nextel spinoff would also mean an overhaul of billing and retail operations.

A source close to Deutsche Telekom told Reuters on Monday that the company had been looking at Sprint since it announced a huge write-off in February. German magazine Der Spiegel had also said Deutsche Telekom was eyeing a takeover or merger.

The Wall Street Journal said Sprint was considering spinning off or selling its Nextel unit and that said Cyren Call, a company founded by Nextel founder Morgan O'Brien, was trying to assemble a group of investors.

"The spinoff of Nextel would be very complicated," said Stifel Nicolaus analyst Chris King.

"Other than the cheap dollar I can't find a logical reason Deutsche Telekom would have an interest in a poorly performing U.S. company with a different technology," he said.

Aside from its floundering share price, M&A speculation has also arisen from Sprint's search for funding to support its costly investment in WiMax, an emerging high-speed wireless technology it has said it will use for an advanced network.

Sprint is close to a long-expected deal to create a WiMax joint venture with Clearwire Corp CLWR.O with $3 billion funding from cable companies, Intel Corp (INTC.O) and Google Inc (GOOG.O), a source familiar with the matter told Reuters.

King said that of the various possible deals, this was the most likely to succeed.

Sprint shares closed up 10.5 percent on the New York Stock Exchange, at $8.72. Deutsche Telekom, which also declined to comment, saw its shares fall 1.5 percent to 11.61 euros.

NEXTEL WOES

Sprint's market value has fallen 66 percent since it bought Nextel Communications for $35 billion in 2005.

Its main problem has been subscriber losses amid customer service and network problems. Nextel's iDen network is incompatible with Sprint's CDMA network. Deutsche Telekom's T-Mobile USA uses yet another mobile technology known as GSM.

Sprint spokeswoman Leigh Horner declined to comment on the reports, but said the company was committed to maintaining the iDen network, saying "it represents a key differentiator."

Chief Executive Dan Hesse told Reuters in early April he was not actively looking for a buyer for the Nextel assets but would evaluate any offers.

Pacific Crest analyst Steve Clement said it was unclear what the Nextel business would be worth to anybody besides Sprint, which recently took a $29.7 billion goodwill write-off related to the Nextel purchase.

"I don't know how feasible it is and how much value that business would have to anybody else given the level of integration with Sprint (Nextel) has gone through and the lack of a strategic future," he said, noting that iDen has no upgrade path for high-speed Web services, a key to future growth in cell phone services.

A Nextel spinoff could make it easier for Deutsche Telekom to buy Sprint, as iDen would be eliminated, but T-Mobile USA and Sprint would still have two separate network technologies.

"That makes it a little bit clearer, but you still have incompatible technologies and the experience with Sprint Nextel says that's not easy to do," said Clement.

Assuming Sprint Nextel stays intact, a merger with Deutsche Telekom's T-Mobile USA would create the biggest U.S. mobile service provider in terms of subscribers, surpassing AT&T Inc (T.N) and Verizon Wireless, a venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).

T-Mobile USA is a distant No. 4 in the U.S. mobile market. Analysts said it could take more than three years to properly integrate the iDen, CDMA and GSM networks.

"While the differing network technology standards does not necessarily eliminate the possibility of a deal, it does significantly raise the costs and complexity," Avian Securities analyst Matthew Thornton said in a research report.

Sprint investors may be wary of a deal at a time when the company's market value is floundering.

Bear Stearns analyst Phil Cusick also said in a note he believed "that operations are still a mess" at Sprint Nextel.

REGULATORY CHALLENGE

Analysts also forecast a drawn-out regulatory review for a Deutsche Telekom deal, made even more unpredictable by the upcoming U.S. presidential elections in November.

Sanford C. Bernstein & Co analyst Craig Moffett estimates that Sprint commands 19 percent of the U.S. wireless market by subscribers, while T-Mobile USA holds 12 percent. Combined, they would exceed AT&T's 27 percent share, he said.

"Such market power concentration would likely draw very significant U.S. antitrust scrutiny," said Moffett.

But other analysts such a deal could likely pass muster with the government, with policymakers growing worried about AT&T and Verizon's strong position. But they also said that the political reaction to a top wireless carrier becoming foreign-owned was still a wild card.

(Additional reporting by Tiffany Wu, editing by Dave

Zimmerman, Andre Grenon, Richard Chang)

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