Sprint's Acquisition Targets: Which Call Options Should You Purchase?

| About: Sprint Corporation (S)

Recently, Dan Hesse, the CEO of Sprint Nextel (NYSE:S), appeared at the Goldman Sachs Group investment conference to say that the telecom industry is likely to undergo a wave of mergers and acquisitions in order for smaller wireless carriers like his to take on the industry's two behemoths, AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), which control 80%+ of the market. Moreover, Hesse stated that Sprint Nextel would have a role in that consolidation process and there are two types of acquisition deals his company might consider: 1) A deal that's big enough for it to gain a significant enough size to take on both AT&T and Verizon Communications or 2) A deal that involves a smaller carrier where there would be immediate cost benefits, synergies and no distractions. Naturally that has Wall Street and retail investors and traders alike speculating once again about which carriers Sprint Nextel might want to acquire and some of the names being put forward are the same ones mentioned in the past.

Possible Sprint Nextel Acquisition Targets

With the above in mind, the following stocks or companies have been mentioned as possible Sprint Nextel acquisition targets:

· Clearwire (CLWR). Offering services in 88 markets in the United States covering an estimated 134.2 million people, Clearwire is a provider of fourth generation (4G) wireless broadband services. Clearwire surged around 13% after Hesse made his comments as Sprint Nextel also owns just under 50% of the company. However, there has been speculation that Sprint Nextel might no longer be interested in acquiring Clearwire as it rolls out its own 4G LTE network.

· Leap Wireless International (LEAP). Offering digital wireless services in the United States under the Cricket brand in South Texas, Leap Wireless International also owns Savary Island Wireless, LLC - the holder of wireless licenses and a spectrum lease that covers the upper Midwest. Goldman Sachs analyst Jason Armstrong as well as RBC Capital Markets have suggested that Leap Wireless International is a potential acquisition target of Sprint Nextel as such a deal would be feasible on the technical side of things. Leap Wireless International's CEO has also recently stated that his company intends to reduce its cash burn for the second half of this year and wants to produce positive free cash flow in 2013. However, he did not offer any specific targets as to how that will be achieved and the stock is down more than 90% over the past five years and has a market cap of around $500 million.

· MetroPCS Communications (PCS). A wireless broadband mobile communications provider covering the cities of Atlanta, Boston, Dallas/Fort Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and the Tampa/Sarasota metropolitan areas, MetroPCS Communications jumped over 5% after Sprint Nextel's CEO made his comments. That's because earlier in the year, Sprint Nextel reportedly walked away from a deal to acquire MetroPCS Communications for $8 billion - a 30% premium. However, Goldman Sachs' analyst Jason Armstrong has recently speculated that Sprint Nextel could acquire MetroPCS Communications simply because it has less debt than Deutsche Telekom's T-Mobile - another name that usually comes up as a potential (but much bigger) acquisition target. In addition, both Sprint Nextel and MetroPCS Communications have networks that are fairly compatible from a technical standpoint while the later would bring more than 9.3 million customers along with airwaves for faster wireless services plus the combined entity would have lower churn rates as a competitor from Sprint Nextel's point of view would be eliminated. Hence, it's a deal that makes sense.

· T-Mobile. Owned by Germany's Deutsche Telecom, troubled T-Mobile provides wireless voice and data communications services throughout the US with 33 million+ contract and prepaid consumer customers. That means acquiring T-Mobile (the fourth biggest carrier in the country) would give Sprint Nextel the scale it needs to take on both AT&T and Verizon Communications but it would also entail big challenges. To start with, government regulators have already rejected an AT&T attempt to acquire T-Mobile for $39 billion but they could be open to a deal involving Sprint as a check on the power of AT&T and Verizon Communications. On the other hand, T-Mobile is a low priced carrier and regulators may not want to see it exit the market. Likewise, the combined entity would also end up having a huge debt burden of $21 billion from Sprint and $15 billion from T-Mobile. Finally, there would be numerous technical headaches as both carriers use different technology. Hence, I don't see a deal involving Sprint Nextel and T-Mobile coming in the immediate future - no matter if both parties might desire such a deal.

A Final Word about Sprint Nextel and Acquisitions

It should be noted that we might just be getting carried away speculating that Sprint Nextel will acquire another carrier. That's because after the failed deal to acquire MetroPCS Communications, some analysts speculated that CEO Dan Hesse lacks the support of his Board to make a deal become a reality and that there might be different lines of thinking between him and the Board. Moreover, some analysts were speculating at the time that such a public breakup of the deal raises questions about Hesse's own future at Sprint Nextel.

With that in mind plus the fact that it's never a good idea to make an investment solely because you think a company is an acquisition target, I would not be rushing out to buy shares of Clearwire, Leap Wireless International and MetroPCS Communications any time soon but perhaps buying call options on some of these carrier stocks could make sense.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.