Rumours of a bid for Sprint Nextel, the third-largest mobile phone operator in the US, have been swirling round the market for a couple of weeks now – something that has been reflected in the trading of its October $4 call options.
Up until now, there has been very little detail about who might be looking at Sprint, other than an assumption it must be Deutsche Telekom because it looked before.
And that is indeed the case, according to the Sunday Telegraph which claimed over the weekend that Deutsche Telekom had called in banking advisers to study a possible multi-billion dollar bid for Sprint.
The company’s decision to call in Deutsche Bank comes hot on the heels of the agreed tie-up of its struggling T-Mobile UK business with Orange to create Britain’s biggest mobile phone firm.
Sources said Deutsche Telekom (DT) could submit a bid for Sprint, which has a market valuation of $10.6bn (£6.3bn), within the next few weeks.
Unsurprisingly that put a rocket under the Sprint share price on Monday morning.
RTRS-SPRINT NEXTEL CORP SHARES RISE 14.2 PCT IN FRANKFURT FLOOR TRADE
RTRS -DEUTSCHE TELEKOM AG SHARES FALL 1.9 PCT IN EARLY TRADE FOLLOWING REPORT IT MULLS BID FOR SPRINT NEXTEL CORP
But just how likely is a deal? The view of traders seems to be it won’t happen. They reckon DT would be nuts to buy Sprint because of the integration challenge. Sprint already has two networks, which they are struggling to make work, adding a third would make things, much, much worse.
On top of that, they point out, that if DT was really thinking of a deal, surely they would have sold T-Mobile UK for cash, rather than creating a joint venture with France Telecom, which ended up costing them £625m.
Note: Sprint would cost more than $11bn and DT would also have to take on $21bn of debt.
There’s no doubt a deal would be frighteningly complex, as Bernstein’s Research’s Robin Bienenstock noted on Monday.
Consolidating T-Mobile USA and Sprint would be dauntingly complex, as it would integrate not just two but three incompatible technology platforms (GSM, CDMA, and iDEN), replicating and compounding what has already been a nightmare merger at Sprint Nextel.
However, she says DT has to do something and buying Sprint might be the least bad option for T-Mobile USA, which is a distant third to Verizon and AT&T Wireless in a market crying out for consolidation.
Revenue growth has slowed sharply industry-wide. Pre-paid pricing has been falling precipitously, and the pricing contagion appears on the verge of creeping into the post-paid market. The problem, put simply, is that there are too many cooks in the kitchen. In most markets, there are as many as seven different price actors.
This deal would have mixed implications for DT investors and would certainly point to a rocky ride. On the one hand, it would be more evidence of a broken portfolio, poor historic management of assets, and lousy timing for M+A. On the other, it would be quite a bold move, and one that shows an uncharacteristic realism that the status quo is terminal and that something must be done to create value with the asset. DT is cheap today, for a reason. It may get cheaper if this deal comes to fruition, but this may still be the best thing that management with a view to the longer term can do
Ironically, the big winners from a Sprint/T-Mobile USA deal would probably be its competitors, according to Bienenstock. They would get the benefit of a more rational industry structure without the heavy lifting of a merger.
Some tough choices lie ahead for DT CEO Rene Obermann.
Related link:
T-Mobile UK chief aims for third slot – FT