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Sprint Nextel (S) announced on Wednesday that it will acquire PCS spectrum and customers from US Cellular (USM). Shares of Sprint Nextel lost over 2.5% during the past trading week.

Shares of US Cellular lost more than 10% in the past trading days on the back of weak third quarter results, and the announcement of the deal.

The Deal

Sprint Nextel announced that it will acquire PCS spectrum and customers from US Cellular in parts of Illinois, Indiana, Michigan, Missouri and Ohio. The deal values the assets at roughly $480 million in cash and the assumption of certain liabilities.

Sprint Nextel will use the extra spectrum to supplement the coverage of Sprint's network in areas mentioned above, in its attempt to deploy the Network Division upgrade and roll out 4G LTE across the nation.

CEO Dan Hesse commented on the deal, "This transaction will enable us to strengthen our business and become a more robust competitor. Acquiring this spectrum will significantly increase Sprint's network capacity and improve the customer experience in several important Midwest markets including Chicago and St. Louis. We welcome the new customers in these markets and look forward to providing them with Sprint's unique combination of unlimited plans, an iconic device portfolio and unmatched customer service."

Sprint will acquire 20 Mhz of Spectrum in Midwest markets. The transaction includes approximately 585,000 cellular customers. If all customers move over to Sprint's $79.99 unlimited per month plan, the acquisition could add over half a billion in annual revenues.

The transaction is subject to regulatory approval, including a review of the Federal Communication Commission. Sprint expects to close the deal in mid-2013.

Valuation

Two weeks ago, Sprint Nextel reported its third quarter results. Sprint reported third quarter revenues of $8.76 billion, up 5.2% on the year. The company reported a net loss of $767 million, or $0.26 per share.

Sprint Nextel ended its third quarter with $6.3 billion in cash, equivalents and short term investments. The company has $21.3 billion in debt outstanding, for a net debt position of $15.0 billion

For the first nine months of 2012, Sprint reported revenues of $26.3 billion, on track to report annual revenues of $35 billion. The company reported a $3.0 billion net loss for the first nine months, on track to report annual losses close to $4 billion.

Sprint is currently valued at roughly $16.6 billion, or 0.5 times annual revenues.

Investment Thesis

Year to date, shares of Sprint Nextel have more than doubled as a result of a surprising twist in the consolidation of the US wireless industry. Shares traded as low as $2 in the beginning of this week and traded as high as $6 on consolidation rumors, currently exchanging hands at $5.55 per share.

Over the past five years, shares have fallen roughly 65%. Between 2008 and 2012, Sprint Nextel consolidated revenues around the $35 billion mark. The company has reported multi-billion dollar losses over the past years. The company struggles to compete given its high debt load and the intense competition.

Sprint recently received $3.1 billion from Japanese Softbank as part of a $20 billion investment deal. Softbank would buy another $4.9 billion in new shares from Sprint Nextel directly, thereby making a direct cash infusion of $8 billion. The company will furthermore exchange 55% of Sprint's existing shares at $7.30 per share, for another $12.1 billion.

Softbank makes a bet that a cash infusion in Sprint Nextel will allow the financially troubled wireless carrier to become a worthy competitor of the market leaders. Sprint has already put the money to use by acquiring the spectrum from US Cellular to boost its network and attract customers.

Sprint Nextel is currently the third largest US wireless carrier of the US. The injection of Softbank is an attempt to create a financially stronger competitor with the likes of Verizon Wireless, partially owned by Verizon Communications (VZ) and AT&T (T). All three carriers are in a rat race to upgrade their network which is under strain of increased data usage.

I remain on the sidelines as the upgrade of Sprint Nextel's network is quite ambitious. Furthermore, the company's larger competitors have strong financial resources, even when factoring in Softbank's investment. The deal with Sprint Nextel could add a lot of prestige, but I question whether they create shareholder value.

Source: Sprint Nextel - Softbank's Cash Results In First Network Upgrade