UPDATE 3-Sprint shares soar on T-Mobile USA tie-up talk

Mon Sep 14, 2009 3:07pm EDT

* T-Mobile USA would jump to No. 2 U.S. spot from No. 4

* Analysts warn of tech obstacles, regulatory scrutiny

* Analysts say DT would need financing to buy Sprint

* Deal comes amid wave of M&A in competitive mobile market

* Sprint stock up 14 pct, Deutsche Telekom down 1.15 pct (Adds analyst comment, share price update)

By Nichola Leske and Sinead Carew

FRANKFURT/NEW YORK, Sept 14 (Reuters) - Sprint Nextel Corp (S.N) shares jumped 14 percent on speculation that the No. 3 U.S. mobile service might be bought by Deutsche Telekom (DTEGn.DE) even as many analysts said such a deal would be very difficult to pull off.

Together, Sprint and Deutsche Telekom's T-Mobile USA would vault to second place in the U.S. mobile market, where they are each having trouble competing against each other as well as market leader Verizon Wireless and No. 2 AT&T Inc (T.N).

But investors were concerned that a Sprint deal would be too costly for Deutsche Telekom and too tough to integrate given their different network technologies. Sprint has a market value of $12 billion and more than $19 billion in liabilities.

Shares of DT, which have a market value of 41 billion euros ($60 billion), closed down 1.15 percent at 9.425 euros and were the sixth biggest loser on Germany's DAX index .GDAXI.

"Despite the potential benefits of a merger we believe combination would also present several challenges," said Piper Jaffray analyst Chris Larsen. "There's no easy deal or no easy road map to a single technology, which is where your synergies come from," he said.

Such a merger would also face a tough review by U.S. antitrust regulators, analysts and regulatory experts said.

Deutsche Telekom and Sprint declined to comment on the merger speculation, which was first reported in Britain's Sunday Telegraph. CNBC reported that Sprint was not aware of any overtures from Deutsche Telekom, citing sources.

Sprint shares rose 50 cents at $4.27 in afternoon trade.

"We believe if Sprint were to be acquired, the board would require a premium valuation in the neighborhood of five (times estimated) 2010 EBITDA, which would equate to roughly $5.50 (per) share," said Michael Nelson of Soleil/Nelson Alpha research. He said Sprint shares currently trade at about 4.2 times estimated 2010 EBITDA.

Heino Ruland of Ruland Research said Deutsche Telekom would have to raise money for a Sprint bid and worried about the "time span needed to return the U.S. peer to profitability." Deutsche Telekom had 5.8 billion euros in cash and cash equivalents as of June 30, according to Reuters data.

Besides moving Sprint shares, the market talk pushed up its bonds. Sprint's 6.875 percent bonds were up 4.25 cents at 78.5 cents on the dollar, according to Market Axess. Meanwhile, DT's five-year credit default swaps widened by 11 basis points to 73/78 basis points, according to UniCredit Research.

CONSOLIDATION NEEDED

There has been a wave of consolidation in the global wireless market, with Deutsche Telekom last week reaching a deal with France Telecom FTE.PA to combine their British mobile phone businesses, and India's Bharti Airtel (BRTI.BO) seeking to buy South Africa's MTN (MTNJ.J).

Analysts say that consolidation would benefit operators as they face some of the toughest competition in years. Investors have also speculated recently weeks that Deutsche Telecom could look at buying Leap Wireless LEAP.O and MetroPCS PCS.N [ID:nBNG423685].

Sprint has been struggling with customer losses and T-Mobile USA, which has a distant fourth place U.S. ranking, is being hurt by aggressive discounts from Sprint and from smaller rivals such as Leap or MetroPCS.

But while Deutsche Telekom may feel pressure to look for a deal, any potential options would have technology pitfalls and questionable possibilities for savings [ID:nLP496822].

Sprint runs two separate networks based on technologies incompatible with T-Mobile USA's network, and it also owns most of Clearwire Corp CLWR.O, which uses yet another technology.

Sprint's botched 2005 purchase of Nextel Communications and its incompatible network is a cautionary tale, analysts said.

"I don't see any quick fixes for either company through this sort of a deal, but with where Sprint has been trading and the assets, it wouldn't be surprising if Deutsche Telekom was looking," said Pacific Crest analyst Steve Clement.

"If they pay a lot expecting a lot of near term synergies, then it's a bad deal. There's not any near term savings from this deal because of the different network technologies."

A combined Sprint, with about 49 million customers, and T-Mobile USA, with about 33 million, would overtake AT&T but still trail Verizon Wireless. owned by Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).

But such a deal would likely face close scrutiny from U.S. antitrust regulators. The Federal Communications Commission, the country's telecom regulator, is already conducting a probe into the competitiveness of certain operators' practices.

"It will definitely raise concern," said Robert Doyle of law firm Doyle, Barlow & Mazard. "I think the four national players constitute a distinct market here."

Even if regulators approve a merger, the combined company could still potentially lose more market share to rivals while it focuses on the complicated integration, Larsen said.

In July Sprint posted a second quarter loss of $384 million and revenue that fell 10 percent to $8 billion. In April, Deutsche Telekom slashed its full-year profit forecast, partly due to a weak performance in the United States.

Speculation about buyers for Sprint have circulated since it announced a large goodwill write-off in February 2008 and shares fell to a five-year low. (1 euro = $1.46) (Reporting by Nicola Leske and Christoph Steitz in Frankfurt and Sinead Carew in New York; Editing by Greg Mahlich, Tiffany Wu, Dave Zimmerman, Phil Berlowitz)