Deutsche Telekom Likely Wants Sprint's Wireline Business, Not the Whole Company

Opinion:

We believe Sprint’s (S) share price does not reflect the company’s underlying value. This is the overriding reason management is pursuing its “slow liquidation” strategy. In total this liquidation will likely realize at least $12 per Sprint share. We suspect this deal may be about Deutsche Telecom (DT) or T-Mobile forming a JV with Sprint and possible Level3 (LVLT) for backhaul than DT buying the company.

The question becomes, is it a good value for Deutsche Telecom?

The last time we heard Deutsche Telecom was considering buying Sprint, we put a very low likelihood of success on a deal. The operational economics would likely be terrible. Too many chiefs, too many incompatible networks, not enough innovation.

Since then, we learned that DT/T-Mobile has floated several trial balloons with the FCC so its ardor for Sprint may be greater than its common sense and cash. We also believe Sprint, T-Mobile and Level3 have discussed forming a JV for backhaul. Sprint/Clearwire (CLWR) needs more Tier 1 capacity, T-Mobile has virtually none of its own and Level three has excess. So perhaps DT/T-Mobile is only looking at one or two of Sprint’s various operations, most likely its Wireline business.

Arguments for some kind of deal:

We believe Sprint and Clearwire are severely undervalued.
If broken up, we believe its assets are worth two to three times the current stock price.

T-Mobile has virtually no-backhaul operations

Sprint is organized to be liquidated:

• Clearwire stock can likely be spun out to shareholders tax free.
• There are two separate wireless units:
  • PCS – Sprint CDMA Service and Virgin Mobile
  • iDEN – Nextel and Boost
• The Wireline business is healthy and is a reasonably well positioned Tier 1 carrier.

There is reasonable overlap between the two companies' spectrum:

• Sprint’s CDMA network runs on 1.9 GHz.
• T-Mobile’s GSM network runs on 1.9 GHZ.

T-Mobile is way behind the 3-G network curve:

• Sprint is the best 3G overall service provider
• Coverage
• Performance

Customer Service:

• T-Mobile is a strong retailer with excellent customer service.
• Sprint is a weak retailer with decent, slowly improving customer service.

Neither carrier has an 4G operational investment at this time:

• T-Mobile plans to go to LTE someday.
• Sprint sold its 4G properties and we expect it will ultimately spin off its Clearwire stock.

Our government probably likes the idea of a strong third carrier to challenge Verizon (VZ) and AT&T (T).

Arguments against a total merger:

Disparate Current Operating Technology

• Sprint uses CDMA and iDEN and has had a nightmarish experience trying to merge the two.
• T-Mobile uses GSM and is moving toward LTE. It does not need two more incompatible networks.

Government regulation/politics

• Foreign ownership of “strategic assets” like spectrum and carriers.
• Excluding Clearwire the two companies would likely exceed spectrum ownerships caps. With Clearwire it would be way off the chart.
• When Clearwire was formed the FCC waived the spectrum cap issue despite AT&T protestations. It is hard to see the three companies under common ownership.
• While T-Mobile is a foreign operator it is number four. It is not clear the FCC would want them to be as large as the combined company, even if that company excluded iDEN and Clearwire.
• Sprint’s iDEN network is rebanding to help public safety operators. It is likely this would have to be completed before any deal consideration.

These comments along with a more detailed explanation were sent to TownHall clients earlier today.

Disclosure: Long Sprint bonds.

Comments

[Tech101:]

Any guess on how much Sprint would ask for its wireline? Q was asking for several billion for its wireline.

However, you may forget XO has a lot of bandwidth and it owns THE nation’s largest LMDS spectrum portfolio with best use for backhaul. More obviously, the Deutsche Bank is a 3.64% XOHO shareholder, and T-System has been a partner of XOHO (T-Systems Selects XO To Expand U.S. Presence: www.xchangemag.com/hot... )

The entire XO is currently worth only $800 million and Carl Icahn has been struggling with the endless legal war with R2 and all the minority shareholders.

Should we feel surprised if a deal strikes?

Sep 15 08:38 PM

[Geddy:]

Isn't the LMDS spectrum you refer to the 2.5Ghz spectrum that Sprextel gave to Clearwire? Wireline has been a "money losing" endeavor for quite some time, with the wireless side of specifically AT&T and Verizon the only parts of those companies making profit.

Sep 16 02:15 PM

[supplier01@...:]

What about partnering with Fiber Tower FTWR? With the national spectrum and a low stock price, they seem like a JV candidate or a take over target.

Sep 25 11:44 AM

[User 494307:]

We know that Dan out sold the network employee to Ericson that mean that hi maid sell the companies. Sprint need to sell IDEN that have became a problem for the pass twoo years.

Oct 01 01:06 PM