Will Deutsche Telekom Buy Sprint-Nextel (S)?

November 28, 2011 by Douglas A. McIntyre

Deutsche Telekom will receive a $4 billion break-up fee if AT&T (NYSE: T) cannot engineer a buyout of the Germany company’s T-Mobile unit. That would create a large war chest. Instead of exiting the U.S. market, which it cannot do without AT&T, DT could elect to increase it position through a buyout of Sprint-Nextel (NYSE: S).

There are a number of reasons that DT may decide to continue to run T-Mobile as the independent, number four wireless operation in the U.S. The $4 billion AT&T break-up fee would allow the Germany company to improve the T-Mobile network, increase marketing and fund new handsets. But T-Mobile still would be left with only about 35 million subscribers, a third of Verizon Wireless’s.

A Sprint-Nextel acquisition may not be worth the price. T-Mobile and Sprint do not run on the same networks. The Sprint WiMax network has not been popular enough with consumers to drive the company’s customer count higher. Sprint would have to pay to accelerate an investment in LTE 4G technology. But Sprint still loses subscribers most quarters.

A buyout of Sprint would be expensive, even though its stock price has fallen sharply over the course of the past year. Sprint’s market cap is $7.2 billion. Its long-term debt is $16.3 billion against a cash position of only $3.7 billion. The total cost of an acquisition would be $30 billion if shareholders got some premium. That is nearly as much as Sprint’s annual revenue of $32 billion. DT’s only option to bring the price lower, at least initially, would be for it to assume a large portion of Sprint’s debt.

Deutsche Telekom remains in a bind without an AT&T deal or one with Sprint. It has little chance to gain on the three companies ahead of it in the market. The situation is made more difficult by the nearly 100% penetration of cellular phones in the U.S. market. The four wireless companies in America can only grow if they take business from one another.

T-Mobile is not much of a property unless it can become larger. And a Sprint deal, no matter how difficult, is the only option to make that happen.

Douglas A. McIntyre

Sprint

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