* 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 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.
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
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)