Dreaming Up A Deal Whereby Apple Buys Sprint

Includes: AAPL, S
by: Michael McGill, CFA

Apple (NASDAQ:AAPL) is always in the news headlines nowadays. When will the next iPhone be released? Or what will be the next update to the oncoming iPad? However, in the investment world, the question is: What is AAPL going to do with all of its cash on hand (retained earnings of $56.2 billion)?

It has been estimated that Apple receives roughly $18 a month (2007 estimate from a Piper Jaffray analyst) from AT&T (NYSE:T) for each iPhone customer it has; most likely there's a similar number from Verizon (NYSE:VZ) as well. This is not a bad deal considering AAPL doesn’t have to do anything in terms of customer service for providing the cell phone coverage or take on the cost of building a wireless network. However, AAPL does have to perform maintenance and repairs on broken/damaged phones. Anyway, AAPL is getting ripped off and AAPL knows it.

This is where Sprint (NYSE:S) comes in to play. Sprint is the nation’s third-largest wireless communications company in the United States based on wireless revenue. Sprint has a $10.75 billion market cap. AAPL has $56 billion in cash, more than enough to make a competitive offer for S. Let’s be conservative in our number of iPhone users in the United States and say there are 10 million, despite estimates of 15.3 million by Comscore in January. Then we will say that, on average, iPhone users pay $80.00 a month for their bill. That is, conservatively, $620 million of revenue that AAPL is missing out on per month ($62.00 * 10 million).

AAPL knows the next logical step for AAPL is to provide the service for the cell phones and take in all the revenue that comes from having phone customers. The given example makes economic sense when referring only to the service provided for the company’s cell phones. What about the extra revenue that would come in from being the proprietary provider of 3G coverage for its iPads?

Obviously S has more than just its toes in the water when it comes to the wireless service industry. S also owns brands Nextel, Boost Mobile, Virgin Mobile and Assurance. AAPL could let S run completely on its own as a subsidy and take part in the cell phone coverage that S provides, or AAPL could sell off the company’s brands and other unneeded assets using Sprint to only provide service to iPhone and iPad users, a viable strategy either way.

So what is to stop AAPL from making this move? AAPL's a hardware company right now and this would take AAPL into a bit of the services industry, but it could end up paying big time, even with Sprint’s $18 billion of debt. Is it time to get long S in some belief this could somehow happen?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.