Sprint, T-Mobile Heading for Imminent Tie-Up?

Analysts Address Another Round of Merger Rumors

Just like daffodils and crocus, rumors seem to pop up every spring of a merger between Sprint-Nextel Corp. (S) and T-Mobile USA. Spring 2009 is no different – except for a few new factors (think “global economic recession”) that are prompting more than the usual speculation about an imminent tie-up between the two.

“A merger may become an inevitable next step” if the two firms grow weaker due to the economy and intense competition, said Medley Global Advisors analyst Jessica Zufolo. That’s because the worldwide recession clearly is bruising service providers, including wireless carriers, with falling subscriber numbers, a shrinking average revenue per user and lower monthly sales all adding to the struggles.

To be sure, T-Mobile parent Deutsche Telekom (DT) last week issued a profit warning in advance of its May 7 earnings call; meanwhile, Sprint continues to fight a poor customer service reputation and ever-declining financials, about which we’ll learn more during the company’s May 4 earnings call. Plus, postpaid providers like Sprint and T-Mobile are getting beat down by the likes of MetroPCS (PCS) and Leap Wireless (LEAP), regional value carriers which sell prepaid, no-contract mobile service plans.

However, a combined Sprint and T-Mobile would overtake AT&T Inc. (T) as the second-largest carrier by total subscribers, Zufolo said. Sprint Nextel has 49 million users and T-Mobile has 32.8 million. AT&T counts 78.2 million. Verizon Wireless (VZ) would remain top dog with 85.7 million subscribers.

It might make economic sense to join forces and emerge with a combined, strengthened position, but there are caveats if Sprint and T-Mobile – the third- and fourth-largest U.S. wireless carriers, respectively – do shoot for a deal. They’ll face challenges that include regulatory approvals, foreign ownership concerns (DT is Germany-owned, after all), and network integration hurdles.

Sprint, T-Mobile and Regulations

Fortunately for the theoretical pair, a Democratic administration is not likely to bar a Sprint-T-Mobile marriage, experts say. The Obama White House might be more inclined than the previous administration to scrutinize industry consolidation, said Zufolo, “but we expect policymakers to show some sensitivity to the realities of the marketplace that have left certain entrants with limited options for long-term growth in the mobile voice and data segment.”

Analysts for investment bank Stifel Nicolaus & Co. Inc. agreed. A transaction that eliminated one of the four national carriers “would be controversial and closely examined,” wrote analysts Blair Levin, Rebecca Arbogast and David Kaut, in a recent client memo. However, government officials appear to understand that “a more-robust third player creates an acceptable market structure, given the strength of the two Bell wireless affiliates.”

Indeed, those affiliates – AT&T and Verizon – actually would welcome a Sprint-T-Mobile merger, said Zufolo. That’s because the wireless industry, with three solid players, would reach a level of pricing security, a circumstance that also could open the door for strategies involving satellite or smaller, regional providers, she explained.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines

Read Comments [2]