| NEW YORK
NEW YORK Sprint Nextel Corp (S.N) is considering making a rival bid for MetroPCS Communications Inc PCS.N, which agreed on Wednesday to a merger with Deutsche Telekom AG's (DTEGn.DE) T-Mobile USA, according to people familiar with the situation.
Sprint, the No. 3 U.S. wireless carrier, is deciding whether to go public with a bid for MetroPCS, or to wait to bid for the combined company, in which Deutsche Telekom will own a 76 percent stake, one of the sources said on Thursday.
Sprint, which according to sources came close to buying MetroPCS for some $8 billion including debt in February, declined to comment.
Analysts and bankers have been expecting a fresh round of consolidation in the U.S. wireless industry since AT&T Inc's (T.N) bid to buy T-Mobile USA collapsed late last year and some analysts worry that if Sprint does not make a move now, it will be left out in the cold.
The market is dominated by No. 2 U.S. provider AT&T and its bigger rival Verizon Wireless (VZ.N)(VOD.L) with Sprint and T-Mobile USA trailing far behind in third and fourth place respectively.
Both smaller companies have been losing customers as they have had trouble competing with bigger and even smaller rivals such as MetroPCS and Leap Wireless LEAP.O, which target the market's fastest growing segment - cost conscious customers who pay for calls in advance and don't commit to contracts.
Several analysts said that Sprint could be in a position to make MetroPCS a better offer than the T-Mobile USA deal while others worried that regulators would oppose a combination of Sprint, MetroPCS and T-Mobile USA.
Sprint's board is having a special meeting at noon on Friday where directors are expected to discuss whether the company should make another bid for MetroPCS, according to a Wall Street Journal story that cited unidentified sources.
SPRINT M&A HEAD DELAYS EXIT
In February, the board backed out of buying MetroPCS just hours before they were set to make an announcement, opting not to spend money when the company needed resources for a costly network upgrade, sources familiar with the matter said.
Sprint is spending billions of dollars to increase its wireless data speeds to catch up with bigger rivals AT&T and Verizon Wireless and is also shutting down an older network from its disastrous 2005 purchase of Nextel.
The sources on Thursday said a Sprint-MetroPCS combination in February would have generated savings of $8 billion to $9 billion, much greater than the synergies expected from the deal between T-Mobile USA and MetroPCS. The merger partners said on Wednesday that their deal could generate savings of $6 billion to $7 billion on a net present value basis.
In the midst of all the speculation, Sprint said in a filing on Thursday that its outgoing president of strategic planning Keith Cowan, who works on mergers and acquisitions, is delaying his exit from the company until January 2 when he will be replaced by Michael Schwartz.
The company, which had announced in August that Cowan would leave September 30, said that Schwartz, currently at Telesat in Canada, cannot join Sprint until January. Schwartz's title will be senior vice president of corporate and business development.
Cowan's prolonged stay and the report about the board meeting may be signs Sprint is seriously considering another bid for MetroPCS, said Wells Fargo analyst Jennifer Fritzsche.
Sprint might be in a position to offer a more favorable deal to MetroPCS given the complicated reverse-takeover structure of the deal with T-Mobile USA, Fritzsche said in a research note.
SPRINT BETTER PLACED
Pacific Crest analyst Michael Bowen said that a MetroPCS deal would help Sprint's spectrum position and estimated that Sprint could pay between $12.50 and $15 per share for MetroPCS by offering its own stock as payment, but added that a deal was not absolutely necessary.
The T-Mobile offer values MetroPCS at $11.28 per share, according to his calculations. MetroPCS shares closed up 3.7 percent on Thursday at $12.69 on the New York Stock Exchange.
When Sprint decided against buying MetroPCS in February, Sprint shares were trading at $2 to $3. They have since risen beyond $5 and closed at $5.09 on Thursday, even after a decline of 2.1 percent for the day.
"They've got a better currency to look at (MetroPCS) now," said Bowen, adding that the break-up fee of $150 million that MetroPCS would have to pay T-Mobile USA if it reneged on their deal and instead chose Sprint was not too onerous.
A key challenge in the MetroPCS/T-Mobile USA deal is their incompatible network technologies.
T-Mobile USA has said it would shut down the MetroPCS network in a process that would take more than two years. In contrast Sprint and MetroPCS use the same CDMA technology standard so they could potentially merge their networks.
Bowen did not rule out a Sprint bid for the combined MetroPCS-T-Mobile USA company. MetroPCS and T-Mobile USA say they expect the deal to be completed in the first half of 2013.
By then, Bowen said, Sprint would have finished the toughest parts of its network upgrade project and would be in better financial shape to handle a big deal.
Macquarie Research analyst Kevin Smithen said he is skeptical of the "lofty" financial guidance T-Mobile USA and MetroPCS issued on Wednesday when they announced the deal.
"We think it is unlikely that two companies with declining revenues will merge into a company with strong revenue growth of 3-5 percent," Smithen said in a research note referring to the company's five-year compounded annual growth rate target.
Pacific Crest's Bowen said the company's margin target range of 34 percent to 36 percent based on earnings before interest, tax depreciation and amortization is unrealistic.
A merger between Sprint and MetroPCS would likely be approved by the Justice Department's antitrust division and the Federal Communications Commission with minimal or no divestitures, said Stephen Axinn, an antitrust expert with the New York law firm Axinn, Veltrop & Harkrider LLP.
Bowen said he would not expect U.S. regulators to oppose a Sprint purchase of a combined T-Mobile USA and MetroPCS.
However, David Smutny, a veteran of the Justice Department who is now at the law firm Orrick, Herrington & Sutcliffe LLP, was not so sure. "If there were a deal between the three of them, it's possible that would be a problem overall."
(Additional reporting by Sinead Carew and Diane Bartz; Editing by Paritosh Bansal, Lisa Von Ahn, John Wallace, Tim Dobbyn and Edwina Gibbs)