Acquisition Speculation Surrounds Sprint

Various international news outlets are reporting that Deutsche Telekom is considering an acquisition of Sprint Nextel. According to Reuters, the German incumbent has been eyeing Sprint since the latter’s US$30-billion writedown in February 2008 (see United States: 29 February 2008: Sprint Goes All In for US$99 per Month as Revenues Continue to Decline and US$30 bil. is Written Off). Der Spiegel, the German magazine, also confirms the operator's interest, while the Wall Street Journal reports that Sprint Nextel is looking at selling or spinning off its Nextel unit. There are also reports that Sprint is close to reaching a deal with several cable TV operators, as well as Intel and Google, on the creation of a US$3-billion WiMAX joint venture.

Meanwhile, T-Mobile USA, which would be integrated with Sprint in any merger, has reportedly launched a 3G network in the shape of W-CDMA/HSDPA in New York, with plans to roll out commercial services to a further 20-25 U.S. markets by the end of 2008.

Another body-blow to Sprint has come in the form of Qwest signing a wireless resale deal with Verizon Wireless. While Sprint will remain a resale partner, Qwest has indicated that it will focus more on its new partnership with Verizon. Under the deal, Qwest customers will be able to use Verizon Wireless handsets and laptop data cards.

Outlook and Implications

• It’s the Season for M&A Speculation:Neither Sprint nor Deutsche Telekom have confirmed the speculation. The story may indeed be part of the ongoing season of speculation surrounding many of the largest telecoms operators. While some reports are based on actual announcements by operators, the speculation surrounding Sprint may mostly be in reaction to its poor performance and ongoing challenges (see World: 29 April 2008: France: 18 April 2008: France Telecom Outlines TeliaSonera Takeover Plans).
• Question Marks for Deutsche Telekom:Deutsche Telekom would like a greater share of the U.S. wireless market. By the end of 2007, it had 28.7 million customers, some way behind the top three of AT&T (70.1 million), Verizon Wireless (63.7 million) and Sprint Nextel (53.8 million). A merger between Sprint and T-Mobile would make the combined wireless carrier the largest in the United States, but there would likely be various obstacles to the deal. Firstly, a deal to create the largest U.S. wireless carrier will face anti-trust scrutiny; the U.S. presidential election could also hinder the process. Secondly, the acquisition would both be tricky to negotiate in the short term, and complicated and costly to implement in the longer term, primarily due to the fact that T-Mobile USA operates a GSM evolution network, while Sprint Nextel operates a CDMA/iDEN network and is rolling out WiMAX. Sprint Nextel’s experience suggests that operating two different types of wireless network represents an uphill struggle. This is an issue that Deutsche Telekom will not ignore. Sprint Nextel has indicated that it wants to continue running its iDEN network, which provides push-to-talk and related services predominantly to business customers. However, the ability of CDMA and GSM upgrades to support similar services has contributed to whittling down Sprint’s post-paid iDEN customer base from 17.6 million in December 2006 to 13.2 million in December 2007. While Deutsche Telekom would arguably be more interested in acquiring Sprint’s CDMA assets, which would give it a combined U.S. customer base of over 56 million, its remains questionable who would buy the Nextel part of Sprint. Without the iDEN assets, the acquisition of Sprint would be risky for Deutsche Telekom, particularly given the uncertain economic outlook in the United States.

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