A Sprint-DT Merger is Far from a Certainty

5/4 - "DT has a very significant problem in the U.S., and it is one that the company cannot overcome on its own. The firm's U.S. wireless venture, T-Mobile, runs a distant fourth among carriers in the U.S...Sprint has deep troubles of its own. It has run into subscriber retention issues since the Nextel merger. The company's financial position is weak...Sprint's plan to build a nationwide 4G network using WiMax is all but dead. The company simply does not have the financing to complete it."

"T-Mobile has nearly 28 million subscribers. Combined with Sprint, it would take the lead in U.S. wireless customers with about 78 million. Integrating the wireless platforms of the two companies would be extremely difficult. But, the alternative is being the fourth horse in a three-horse race."

5/5 - "There are advantages to being bigger, like better access to hot, new phones, and economies of scale. AT&T's (T) position as the biggest U.S. wireless provider has no doubt helped it score exclusive access to Apple's (AAPL) iPhone, new RIM (RIMM) BlackBerries, Garmin's forthcoming Nuvifone, etc.

And Sprint's pretty cheap: Despite a 9% bump this morning, with a $24 billion market cap, its stock is still down 64% from its 52-week high, reached last summer. (Though whoever buys it also gets to take home $20 billion in debt.)

But there are big technical and organizational hurdles that could make a T-Mobile - Sprint combo a tricky one...The carriers use three different, incompatible wireless technologies -- Sprint uses CDMA for its cellphone network and iDEN for its Nextel walkie-talkie network, while T-Mobile uses GSM, the wireless technology that's most popular around the world...Sprint's already committed to building a next-generation network using a technology called WiMax, while other GSM carriers are leaning toward a rival, forthcoming technology called LTE....Competing bidders could emerge, driving up the price...A new owner won't quickly change the fact that Sprint is losing customers and is a financial mess. Its turnaround will be long and slow, and any technology transition won't speed it up."

5/5 - "While Sprint Nextel (S) shares are higher this morning on reports that T-Mobile parent Deutsche Telekom (DT) is mulling an acquisition offer, the Street is skeptical about the prospects for such a deal."

"Phil Cusick, Bear Stearns: “While the U.S. market needs consolidation, this deal is unlikely to happen in 2008,” he writes. Cusick thinks Sprint holders would be unlikely to sell below $10 without giving management a chance to turn the business around...He has a Peer Perform rating on the stock."

"Michael Rollins, Citigroup: “The problems at Sprint still seem deep-rooted and may deter a buyer in the near-term for the assets given the risks that subscriptions and cash flow may not trough until between 2009 and 2010,” he writes. Rollins but the chancs of a deal for Sprint in the next 12 months at 25%."

"Craig Moffett, Bernstein Research: “One can presume that the arguments for a DT acquisition rest on market consolidation rather than cost synergies,” he wrote. “Indeed, the lack of cost synergies argues against such a deal…an acquisition would only exacerbate Sprint’s existing two-network problem by saddling T-Mobile with yet a third incompatible platform.” The advantage for DT, he says, would be consolidating the market; but in the process he thinks a deal “would likely draw very significant U.S. anti-trust scrutiny.”

4/21 - "Based on the intrinsic value of its spectrum holdings and its business operations, Sprint (S) is still a steal at its current market cap."

"A rough calculation valuing Sprint's spectrum holdings at $1 per MHz - pop for iDEN spectrum at 800 / 900 MHz, $.75 per MHz - pop for PCS spectrum at 1.9 GHz, and $.50 per MHz - pop for WiMAX spectrum at 2.5GHz, easily yields an intrinsic value of over $10B. By being even more conservative and downgrading the value of Sprint's spectrum holdings by 20% to $8B still leaves one to argue that, with current debt being factored in, the remaining bricks and mortar, equipment, iDEN, long distance and IP / wireline, CDMA and WiMAX businesses together are worth only $8 - $10B at the current stock price."

"By my reckoning, the depressed stock price is in large part due to historically and entrenched (below the current CEO) decision making, leadership and management, manifested in customers so dissatisfied that they leave the network, despite network quality and reliability being good...it really is hard to see how conditions can get worse. Hesse has already prepped investors' expectations by forecasting a large subscriber loss for first and second quarter, 2008, as iDEN continues to bleed perhaps unprecedented subscribers in the wireless industry."

"When looking into the abyss, it's easy to imagine an infinite drop into the darkness. On the other hand, the drop may only be a few feet. I believe iDEN will stabilize before the end of 2008. When that happens, the emotion depressing Sprint's stock price will burn off and the price will bounce back. So, for now, if a suitor can put together the financing in the current credit environment, now is the time to acquire Sprint."