AT&T Does Sprint a Favor by Taking T-Mobile

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Includes: S, T
by: 451 Research: Inorganic Growth

By Ben Kolada

If the rumors that Sprint (NYSE:S) was eyeing T-Mobile USA were actually true, then AT&T (NYSE:T) did its competitor a big favor by taking in the divested business. From our view, T-Mobile would have been a bigger bite, both financially and operationally, than Sprint could have swallowed. The transaction would likely have introduced a whole new set of tricky integration problems just at a time when Sprint is (finally) emerging from the set of problems it took on when it did its last big deal, the $39bn purchase of Nextel in late 2004. (Sprint shares have lost 80% of their value since that ill-fated acquisition.)

Sprint is already the only national carrier managing three different networks (CDMA, iDEN and WiMax), and the addition of T-Mobile would have added a fourth, bringing additional cost and complexity to the carrier’s operations. And while Sprint is moving back into the black, T-Mobile’s financial performance wouldn’t necessarily have helped that effort. (Don’t forget that the Deutsche Telekom subsidiary has long been a laggard, in terms of margins and subscriber growth, and is being divested for less than it was acquired.) While Sprint is adding subscribers and is finally growing revenue (2010 marked the first time in four years that it grew its top line), subscriber and revenue growth at T-Mobile have been flat.

Instead of T-Mobile, several of the remaining cellular properties in the US would fit better, both technologically and financially, with Sprint. While Sprint’s share price plummeted on AT&T’s news, stocks of regional cellular carriers such as MetroPCS (PCS) and Leap Wireless (LEAP) soared on buyout speculation. Like Sprint, both are CDMA network operators, and both would provide Sprint with growing revenue and subscriber bases. And both companies are still within Sprint’s price range.

Even with M&A speculation inflating their valuations, MetroPCS and Leap currently sport $5.5bn and $1.1bn market caps, respectively. A cash-and-stock deal similar to AT&T’s T-Mobile acquisition could actually put both under Sprint’s ownership, since Sprint is sitting on $5.5bn in cash and short-term investments. And Sprint actually seems the most likely acquirer for these companies, even though Verizon is widely speculated to react to AT&T’s announcement with a deal of its own. Given the scrutiny that AT&T’s pending purchase of T-Mobile is expected to receive, we doubt that Verizon, currently the nation’s largest cellular carrier, could make a deal without regulators saying they’ve had enough.