Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), did not just sit on its hands while AT&T tried to push through the T-Mobile deal. The company paid $3.6 billion for unused spectrum owned by SpectrumCo, a consortium of Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable Inc. (NYSE: TWC), and Bright House Networks.

Other potential AT&T acquisitions include MetroPCS Communications Inc. (NYSE: PCS), Leap Wireless International Inc. (NASDAQ: LEAP), and even Sprint Nextel Corp. (NYSE: S). But none would be as good as a deal for Dish.

AT&T’s main problem is that it would have to pay a premium price for Dish — perhaps as much as $50/share, or about 70% above today’s share price. That would value Dish at around $22 billion, a steep price given that AT&T just paid out $4 billion to T-Mobile in break-up fees. Even Ma Bell can’t afford to pay that kind of money too often for nothing in return, and it’s a sure bet that Dish would want a substantial break-up fee as part of any deal.

A report at Bloomberg News notes that Verizon Wireless owns 56 percent more 4G spectrum than AT&T in the top 10 markets and 46 percent more in the top 100. Verizon Wireless also claims 107.7 million subscribers compared with AT&T’s 100.7 million. Had AT&T been able to acquire T-Mobile, it would have increased its spectrum by 62%, leveling the playing field.

Dish recently acquired wireless spectrum from two bankrupt satellite television companies for about $2.8 billion in a deal that is still awaiting FCC approval. Verizon’s deal with SpectrumCo also needs regulatory approval, and so far there is no indication that either approval is in trouble.

But what does AT&T want with a satellite TV business? Of course it could hive it off once the deal is done, but it might make more sense to go after MetroPCS or Leap, both of which are simply wireless carriers. Or AT&T might be able to get Dish to sell just the spectrum. That would not be the best deal for Dish shareholders, but the company’s management would certainly be able to retire following such a transaction.

Dish shares are trading up more than 2% today at $29.34 in a 52-week range of $20.85-$32.56. Shares of AT&T are up almost 1% at $30.30 in a 52-week range of $27.20-$31.94.

One issue to consider… Dish would have every right in the world to demand another massive deal break-up fee in case the telecom giant could not convince regulators that this is good for consumers.

Paul Ausick

Altera Corporation (NASDAQ: ALTR) Raised to Outperform at BMO Capital Markets.
AutoZone Inc. (NYSE: AZO) Maintained as Buy with a price target of $381 by Argus.
Boardwalk Pipeline Partners, LP (NYSE: BWP) Started as Neutral at JPMorgan.
Boeing Co. (NYSE: BA) Raised to Overweight with $82 price target at Morgan Stanley.
Bally Technologies, Inc. (NYSE: BYI) Raised to Overweight at JPMorgan.
El Paso Pipeline Partners, L.P. (NYSE: EPB) Started as Overweight at JPMorgan.
E I DuPont de Nemours & Co. (NYSE: DD), or DuPont, Cut to Neutral at Citigroup; Lowered estimates for DuPont at Credit Suisse.
Edwards Lifesciences Corp. (NYSE: EW) Raised to Buy with $75 target at Canaccord Genuity.
Kindred Healthcare, Inc. (NYSE: KND) is already a strong buy but was named as the value stock of the day by Zacks Investment Research.
Lennar Corporation (NYSE: LEN) Cut to Hold at KeyBanc.
Linear Technology (NASDAQ: LLTC) Reiterated Underperform and named Bear of the Day by Zacks Investment Research.
MetroPCS Communications, Inc. (NYSE: PCS) Started as Outperform at Credit Suisse.
Pall Corporation (NYSE: PLL) on Focus List and raised price target to $68 at Credit Suisse.
PNM Resources, Inc. (NYSE: PNM) Cut to Market Perform at Wells Fargo.
PS Business Parks (NYSE: PSB) reiterated Outperform and named as Bull of the Day at Zacks.
SAP AG (NYSE: SAP) Reiterated Buy with $84 price target objective by Argus.
Toll Brothers (NYSE: TOL) Cut to Hold at KeyBanc.

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JON C. OGG

Altria Group Inc. (NYSE: MO) Started as Buy at Deutsche Bank.
Advance America, Cash Advance Centers Inc. (NYSE: AEA) named as value stock of the day at under 10-times earnings by Zacks.
Crown Holdings Inc. (NYSE: CCK) Started as Outperform with $43 target and was added to the Focus List at Credit Suisse.
General Electric Co. (NYSE: GE) Raised to Outperform by Bernstein (call was made late Monday afternoon).
Hibbett Sporting Goods (NASDAQ: HIBB) maintained Outperform with $47 target and named as Bull of the Day at Zacks.
HSBC Holdings PLC (NYSE: HBC) started as Underperform and named as Bear of the Day at Zacks.
ITC Holdings Corp. (NYSE: ITC) Cut to Neutral from Outperform at Credit Suisse.
LinkedIn Corporation (NYSE: LNKD) Raised to Overweight at JPMorgan.
MetroPCS Communications, Inc. (NYSE: PCS) Raised to Outperform from Market Perform on valuation by William Blair.
SAP AG (NYSE: SAP) Cut to Hold at S&P Equity Research.
Sonoco Products Co. (NYSE: SON) Started as Neutral with $34.00 price target at Credit Suisse.
Tesoro Corporation (NYSE: TSO) Cut to Neutral with $34 target from Outperform at Credit Suisse.
Verizon Communications Inc. (NYSE: VZ) Reiterated Buy with a $44 price target at Argus.

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JON C. OGG

One big weight on the entire group is the proposed $39 billion merger between AT&T and T-Mobile USA, a unit of Deutsche Telekom (DTEGY). If the merger is approved, AT&T’s subscriber count will surge even further past second-place Verizon’s.

Sprint has complained loudest about the proposed merger, and with good reason. While it now ranks third in subscriber numbers, it would almost certainly be the first casualty of the combined AT&T/T-Mobile. Sprint’s latest strategy — betting the company on the iPhone from Apple (NASDAQ: AAPL) — could really get hammered if AT&T is able to acquire T-Mobile’s low-end subscriber base. AT&T already offers an iPhone 3GS for just $49, an offer Sprint really would not be able to compete with.

CenturyLink, now the proud owner of Qwest, is going to be busy digesting that acquisition for some time. The company’s latest earnings report was littered with higher costs related to the merger.

Frontier’s landline business could be a profit generator for a while longer, and the company’s high dividend yield strongly recommends the shares. The company may offer the safest short- to medium-term play among all these stocks.

Leap and MetroPCS talked about a merger last year but were never able to agree on the deal. They may not have any other choice if they want to survive.

Here’s a closer look at some of the numbers. All data from Yahoo! Finance, with current prices gathered around noon today.

AT&T target price remained essentially flat at $32. The current price is $29.07, which equals an implied gain of $2.93, or 10%. The company’s dividend yield is 5.8%, and the forward P/E is 11.68. The implied gain has fallen a bit as the company’s share price has risen by about 1% since October 11th. The company is due for a dividend raise, probably about $0.01/share/quarter, if the past two years are any guide.

Verizon’s target price has been raised from $38.61 to $40.00. Today’s price is $36.94, marking an implied gain of $3.06, or 8.3%. The company’s forward P/E is 14.48 and the stock’s dividend yield is 5.3%. The stock’s 52-week high is $38.95, just 5% above the current price. Verizon raised its dividend by 2.6%, to an annualized $2/share in September.

Sprint’s target price has been lowered from a median of $5.68 to $3.15. The stock is currently trading at $2.87, for an implied gain of $0.28, or 9.8%. The share price today is also 23% higher than it was last month and could easily clear the very low bar set by the target price. When the company will return to paying a dividend is anyone’s guess, but do not expect one for at least another year.

CenturyLink’s target price has remained essentially flat at $44.00. The shares are trading today at $37.29, for an implied gain of $6.71, or 18%. The company pays a dividend yield of 7.7%, and its forward P/E is 8.72. The company’s annual dividend of $2.90 has not changed for seven quarters, but the solid dividend yield is still very attractive.

Frontier’s target price has fallen from $7.84 to $6.50. Shares are trading today at $5.43, for an implied gain of $1.07, or 19.7%. Of the stocks in our review, Frontier is the only one trading lower today than it was a month ago, and came within pennies of touching its 52-week low earlier today. The company’s 13% dividend yield is slightly higher than it was last month, due of course to the lower stock price. The annual dividend was lowered from $1/share to the current $0.75/share in September last year, but the company has committed to maintaining its dividend.

Leap Wireless’s target price has remained the same at $11.00. Shares are trading today at $9.04, for an implied gain of $1.96, or 21.7%. The company does not pay a dividend and its forward P/E is negative. The book value of the stock is $8.81/share, and the implied gain is a fantasy.

MetroPCS’s target price has fallen from $15.12 to $12.50. Shares are trading today at $8.65, for an implied gain of $3.85, or 44.5%. The company pays no dividend and the forward P/E is 8.21. Like Leap, MetroPCS’s survival likely depends on a merger, probably with Leap.

Finally, we should note that AT&T and Verizon are both growing their broadband subscriber bases, and that among large business users the two companies garner nearly half of all the internet service provider (ISP) business. Among medium-sized businesses, the two capture more than a third of all ISP business, and among small business, the two get 20% of all ISP business. AT&T gets 20% of all U.S. business traffic and Verizon gets 12%. Business ISP services are more competitive even than household services, so this could change quickly, except that neither AT&T nor Verizon is likely to allow themselves to be severely underpriced.

Unless and until the AT&T/T-Mobile merge is approved, telecom service in the U.S. is a two-horse race. If the merger is allowed, the race might turn into a runaway with an uncatchable leader, a couple of also-rans and a few stragglers.

Paul Ausick

MetroPCS did not fare as well. The company reported EPS of $0.19 on revenue of $1.2 billion. Consensus estimates called for EPS of $0.23 and revenue of $1.22 billion. The company added 69,000 new customers in the quarter, a big drop from the 199,000 it added in the second quarter.

The challenge from Sprint Nextel Corp. (NYSE: S) and T-Mobile in the pre-paid market hurt MetroPCS’s revenues and earnings. This does not help the AT&T/T-Mobile plan to sell off some assets to other carriers as the two companies try to get their proposed merger through the regulatory process. MetroPCS was viewed as a possible buyer of those assets, but lower customer additions and lower profits are not usually conducive to expansion plans.

Sprint has no interest in buying any assets that AT&T/T-Mobile want to shed. The number three US carrier has fought the proposed merger every step of the way. Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD), has had essentially no comment on the proposed merger, but certainly has little to gain from a tie-up between AT&T and T-Mobile.

The US Justice Department’s suit to stop the merger got a boost yesterday when a federal court prevented H&R Block, Inc. (NYSE: HRB) from buying low-cost tax preparer TaxAct, citing anti-trust violations. The deal was worth less than $300 million but the Justice Department argued that the merger would leave just two tax-prep firms, Block and Intuit Inc. (NASDAQ: INTU). Similarly, the AT&T deal would leave just one behemoth, AT&T, while Verizon Wireless would fall to a distant second place and be virtually forced to acquire Sprint in order to stay competitive.

The inability or unwillingness of another company to pick up AT&T/T-Mobile assets, coupled with the Block ruling, could be the beginning of the end for the proposed merger.

MetroPCS shares are down more than -7% this morning at $7.89, after posting a new 52-week low of $7.58. Leap Wireless is faring better, up more than 16%, at $8.09, in a 52-week range of $5.50-$17.66.

Paul Ausick

When Sprint Nextel Corp. (NYSE: S) announced earlier this month that it would bet the company on its sales of the iPhone from Apple Inc. (NASDAQ: AAPL), investors pounded the stock down to a 52-week low of $2.10. Following today’s third-quarter earnings report, that number could be in danger, as the shares are down more than 7% in the first half-hour of trading. Interestingly, Sprint’s numbers weren’t so bad.

The number three wireless carrier in the US, behind AT&T (NYSE: T) and Verizon Wireless, a joint venture of Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD) reported an EPS loss of -$0.10, less than half the consensus estimate of -$0.22. The company also came close on the revenue estimate of $8.38 billion, posting revenue of $8.33 billion.

A particular beneficiary of Sprint’s report is Clearwire Corp. (NASDAQ: CLWR). Sprint has signed a non-binding agreement to get Clearwire’s 4G/LTE network rolled out to customers. Clearwire’s shares have jumped more than 25% this morning on the announcement. Competing low-cost carriers MetroPCS Communications, Inc. (NYSE: PCS) and Leap Wireless International Inc. (NASDAQ: LEAP) appear to be getting some halo effect from Sprint’s report as well.

Sprint added nearly 1.3 million subscribers during the quarter, its best performance in five years. Average revenue per user (ARPU) rose by $3 year-over-year — from $55 to $58 — and the company’s subscriber base is up 23%. The company said that its launch of the iPhone on October 14th beat expectations and that Sprint expects its iPhone customers to be among its most profitable. The company did not provide sales figures for the iPhone, and no iPhone sales were included in the quarterly report.

What’s causing investors to run away from Sprint shares this morning is the company’s statement that it needs to raise as much as $7 billion to pay its bill for the iPhones and to upgrade its network (that’s where Clearwire comes in). All three credit rating agencies lowered their ratings on Sprint’s credit following the iPhone announcement. The company’s long-term debt now stands at nearly $20 billion and its cash and equivalents are reported at $4 billion.

Adding another $7 billion to its debt, if it’s even possible, will be very expensive. Investors must only see a continuation of the company’s record of 16 consecutive quarters of losses. If the proposed merger of AT&T and T-Mobile is approved, Sprint could be in the unenviable position of being the highest priced of the low-price carriers, with no realistic hope of getting out from under its pile of debt. Doubling down, as the company is doing with its iPhone play, may be the last desperate gamble Sprint makes.

Investing in and speculating in the price of Sprint’s stock sure looks and feels a lot like the punchline to a bad (and unnamed) joke… “No, it’s your turn to be in the barrel today!”  Yes, it really is that bad. 

Sprint shares are down more than -9%, at $2.46, in a 52-week range of $2.10-$5.35. Clearwire’s stock is up nearly 23%, at $2.01, in a 52-week range of $1.24-$7.40. MetroPCS shares are up more than 2.3%, at $9.31, in a 52-week range of $7.75-$18.79.

Paul Ausick

AT&T (NYSE: T) has a mean price target of $32.33 from 24 brokers. In early afternoon trading today, shares are priced at $28.78, for an implied gain of $3.55, or 11%. AT&T’s forward P/E is 11.30 and the company’s dividend yield is 6%. The stock’s 52-week trading range is $27.20-$31.94, and it’s trading today about 6% above its low and about 10% below its 52-week high. The company’s $39 billion offer for T-Mobile USA would make it the largest US mobile carrier, but a US Justice Department lawsuit could kill or at least slow down the conclusion of that deal.

Verizon Communications Inc. (NYSE: VZ) has a mean price target of $38.61 from 27 brokers. Shares are now trading at $36.61, for an implied gain of $2.00, or 5.2%. Verizon’s forward P/E is 14.13 and the company’s dividend yield is 5.5%. The stock’s 52-week trading range is $31.60-$38.95, and it’s trading today about 15% above its annual low and about 6% below its 52-week high. Verizon has the lowest implied gain of all the stocks in this list, which could be a result of investors’ reaction to the AT&T/T-Mobile deal that would put Verizon substantially behind AT&T in number of subscribers.

Sprint Nextel Corp. (NYSE: S) has a mean price target of $5.28 from 28 brokers. Shares are trading at $2.34 today, for an implied gain of $2.94, or 55.7%. Sprint’s forward P/E is negative and the stock does not pay a dividend. The stock’s 52-week trading range is $2.10-$6.45, and it’s trading today about 11% above its 52-week low and 64% below its 52-week high. The numbers on Sprint don’t tell the full story, though, as analyst downgrades have hit the stock hard recently and most of the new price targets are in the $3/share range. The company’s decision to bet the farm on Apple’s iPhone has sent investors fleeing.

Frontier Communications Corp. (NYSE: FTR) has a mean price target of $7.84 from 14 brokers. The stock is trading around $5.92 today, for an implied gain of $1.92, or 24.5%. Frontier’s forward P/E is 14, and the company’s dividend yield is 12.80%. The stock’s 52-week trading range is $5.33-$9.84, and it’s trading today about 11% above its low and almost 40% below its 52-week high. Frontier’s attraction to shareholders is its high dividend yield, which the company’s board recently affirmed its intention to continue paying the $0.75 annual dividend.

CenturyLink, Inc. (NYSE: CTL) has a mean price target of $44.12 from 17 brokers. Shares are trading today at $33.56, for an implied gain of $10.56, or 23.9%. CenturyLink’s forward P/E is 18.95 and the company’s dividend yield is 8.8%. The stock’s 52-week trading range is $31.16-$46.87, and it’s trading about 8% above its low and 28% below its 52-week high. CenturyLink just completed its $24 billion acquisition of Qwest, which gives the combined company a large base of landline subscribers who are not sticking around. The company needs to improve its mobile subscriber numbers and to juice up its broadband base, but that dividend is mighty tempting these days.

Leap Wireless International Inc. (NASDAQ: LEAP) has a mean target price of $10.95 from 20 brokers. Shares are trading at $6.00 today, for an implied gain of $4.95, or 45.2%. Leap’s forward P/E is 20 and the company does not pay a dividend. The stock’s 52-week trading range is $5.50-$17.66, and it’s now trading about 9% above its annual low and about 66% below its 52-week high. Leap, along with MetroPCS, are among the low-cost providers of wireless service and both companies focus on pre-paid subscribers who buy minutes as needed, unlike the contract (post-paid) subscribers at AT&T or Verizon. The two companies talked merger last year, but were unable to reach a deal.

MetroPCS Communications, Inc. (NYSE: PCS) has a mean price target of $15.12 from 23 brokers. Shares traded today at $8.33, for an implied gain of $6.79, or 44.9%. MetroPCS’s forward P/E is 8.13 and the company does not pay a dividend. The stock’s 52-week range is $7.75-$18.79, and it’s now trading about 10% above the annual low and about 56% below its 52-week high. MetroPCS, and Leap, both address the only part of the mobile market that is still showing significant growth — the low-end customer unable or unwilling to pay north of $100 for a smartphone. T-Mobile, which also competes at this end of the market, is stymied by the takeover offer from AT&T. Both Leap and MetroPCS also need some help from falling handset prices. More merger talks could be on the horizon as well. MetroPCS’s market cap of just around $3 billion is 6 times Leap’s of around $500 million. Not a lot of extra clout and probably not a lot of cost-cutting synergies either.

Paul Ausick

DT CEO Rene Oberman is thinking in terms of spectrum. Right now the largest 4G LTE network belongs to Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD). AT&T wants to acquire T-Mobile’s 4G spectrum and the German company’s cell towers in an effort to be able to blanket virtually the entire US with AT&T 4G coverage. The combined company’s subscriber numbers would also swell, to 43% of the total US market, compared with Verizon Wireless’s 34% and Sprint Nextel Corp. (NYSE: S) with about 16%. The other 7% will be divided among smaller carriers like Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications, Inc. (NYSE: PCS).

Oberman told a German newspaper that the combined company will boost competition in the US by adding to available network capacity. The real problem in the US isn’t lack of competition, it’s lack of spectrum. We’re already seeing the effects of this lack with the introduction of tiered pricing for wireless users. The more bandwidth you consume, the more it’s going to cost you.

The US Federal Communications Commission recognizes that this lack of spectrum will eventually lead to higher prices because supply will not be able to keep up with demand. From the FCC’s point of view, choking consumer use of wireless service slows down investment and innovation. AT&T would probably agree with that assessment. Where the FCC and AT&T part company is on the best way to boost US wireless capacity.

The DoJ is looking at the proposed merger through a lens that equates market share with market power. That may have been true once, but is not true to the same degree in the network age. There will always be an innovator to go after an underserved, overcharged market.

AT&T and DT are banking on being able to convince a judge that far from being anti-competitive, the proposed merger will be just the opposite. The DoJ’s track record on lawsuits of this kind is pretty lousy. In the past 20 years, the DoJ has thoroughly investigated just 4.4% of all proposed mergers and tried to stop less than 1%. Even then, odds are only about even that the DoJ wins in court.

Sentiment in the US is running pretty high right now against big corporations and big banks, but sentiment does not usually carry a lot of weight in court. AT&T’s & DT’s arguments supporting the proposed merger have a lot of merit, and that is what DT’s Oberman is banking on when he says he believes the deal will finally be approved. As strange as it may seem, the odds are in his favor.

Paul Ausick

Sprint’s filing looks like nothing so much as a precautionary move in the event that the government and AT&T come to some settlement of the Justice Department’s lawsuit. Sprint’s lawsuit could at least disrupt any anticipated smooth sailing that AT&T might expect from such a settlement.

The latest lawsuit was filed as a “related case” to the DoJ’s lawsuit, according the announcement from Sprint. The nation’s third-largest wireless carrier says the proposed merger would harm retail and corporate customers by raising prices and stalling innovation. In addition, the merger would allow AT&T and Verizon to control 75% of the woreless market and 90% of the profits in that market. Sprint also nots that the market power of AT&T/T-Mobile would give the company so much control over a number of services that it would serve to damage competitors’ businesses and “ultimately to damage competition.”

Without comparing the DoJ’s suit word-for-word with Sprint’s, it’s tough to find much difference between summaries of the two lawsuits. Sprint does say that it expects to “contribute our expertise and resources” to proving that the proposed merger is illegal.

An interesting thought on that is that if Sprint is contributing resources to the fight against the merger, perhaps the company is hoping that it can put a little steel in the DoJ’s spine in the event that the government appears willing to settle.

And if that settlement comes about anyway, Sprint can still fight the merger, or at least toss a little sand in the gears. The technical term for this is the ‘belt-and-suspenders’ approach.

Sprint’s shares are down about -2.5% in mid-afternoon trading, at $3.45, after posting a new 52-week low of $3.44. The 52-week high is $5.35. AT&T’s shares are down about -0.9%, at $27.81, barely within the 52-week range of $27.14-$31.94.

Paul Ausick

In fact, if history is any guide, it is more likely that a deal will be struck that allows the merger. Opposition from Sprint Nextel Corp. (NYSE: S) could be muted by the fact that the merger would leave Sprint as the only large low-cost provider in the US. A combined AT&T/T-Mobile would hold about 43% of the US mobile phone market, while Verizon Wireless would own about 34%. Verizon Wireless is a joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD). Sprint gets about 16% and the rest is spread among smaller players like Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications, Inc. (NYSE: PCS).

The crux of the DoJ’s complaint is the anti-competitive nature of the proposed merger. As lower-cost providers, T-Mobile and Sprint offer consumers both more choices and lower prices. A single low-cost provider with just 16% of the market is unlikely to be effective in challenging the pricing practices of either AT&T or Verizon Wireless. That’s the thinking of the DoJ.

A possible tie-up between T-Mobile and Sprint has also been raised. That combination would own about 27% of the market, enough to give it some muscle against the two bigger players. In order for such a deal to happen though, the federal government would practically have to back the deal itself. Sprint’s market cap is a tidy $11 billion or so, but there’s no way the company could put $39 billion on the table against AT&T, with a market cap of about $168 billion.

At some point, T-Mobile and Sprint, if they remain independent, will either be forced to merge or to be acquired by either AT&T or Verizon Wireless. AT&T could argue against the DoJ’s complaint that the company is merely being visionary, not rapacious.

A report from CNNMoney notes that the DoJ’s record in these kinds of cases is not particularly strong.  In the past 20 years, the DoJ has thoroughly investigated just 4.4% of proposed mergers and tried to stop just 0.3%. Even then, the odds are only about even that the DoJ will prevail.

AT&T would have to pay a $3 billion break-up fee to T-Mobile if the deal falls through. If Ma Bell chooses instead to fight the complaint, its legal costs won’t exceed a fraction of that. Why not fight?

If AT&T does decide to fight, all the company’s arguments related to spectrum and network expansion are details. AT&T must be able to show that its acquisition of T-Mobile will not harm consumers either by forcing prices to rise or by stifling innovation. That’s a rough road, but not an impassable one. This merger isn’t over til it’s over.

Paul Ausick