Sprint: Color on Recent SK Telecom M&A Chatter

Includes: S, SKM
by: Notable Calls

On July 15, CNBC reported that SK Telecom (NYSE:SKM) is in talks with Sprint (NYSE:S) to acquire part or all of Sprint. The report added that no deal is imminent and no price has been set at this juncture. Meanwhile Reuters reported that SKT is in talks with Sprint on a technology alliance, rather than a takeover.

- Citigroup notes SKM remained silent on this news, but they view it as highly likely that SKT is looking for opportunities around Sprint to scale up its US presence. Combining Helio with Virgin still leaves it with a subscale US presence. Citi thinks SKM believes it has competitive edge in technology to make a difference.

SKM's market cap of $15 billion compares with Sprint's $25 billion. Citi believes SKM would have to be part of a buyer consortium rather than going it alone. Assuming, say, a 20% stake in Sprint is acquired at current levels and SKM takes half, the required $2.5 billion of investment would be more easily digestible.

- Goldman Sachs believes at ~$45 billion in enterprise value and $25 billion market cap, the size of a potential outright acquisition of Sprint would be problematic given SK Telecom's smaller size ($15 billion market cap). This deal would require a sizeable cash component, an unlikely scenario in current capital market conditions.

SK Telecom partnered with Providence Equity and approached Sprint last November with a proposal for an equity infusion of $5 billion, possibly more. The firm notes that the previous funding offer was made when Sprint stock was at ~$15, 70% above current levels.

Goldman remains Neutral on the stock, and believes the risk/reward is not compelling. The firm's analysis leads them to a potential of breakup value of $12 for Sprint and a ~$5 value value for assets.

- Cowen is most positive of the bunch saying they expect Q2's results to show improvement and see upside to estimates. Moreover, SK Telecom's interest highlights strategic possibilities.

The firm believes churn dropped steadily in Q2. They project postpaid churn of 2.4% vs. Q1's 2.5%. They also believe the Instinct handset, plus the new ad campaign, boosted store traffic. They have seen that in their store visits. Cowen projects postpaid net ad losses to slow to 1.0 MM from 1.1 MM in Q1, but also thinks the number could be 0.9 MM or lower.

The firm continues to view Sprint with 53 MM subs and T-Mobile with 31MM subs as being at a scale disadvantage to Verizon (NYSE:VZ) with 79 MM subs (pro forma for Alltel) and AT&T (NYSE:T) with 71 MM. With the WiMAX spin-off to Clearwire, Sprint appears to need a 4G migration strategy, which a partner could help.

Notablecalls: Notablecalls Network Telco is convinced the deal will take place this year (pinged me last night). Some of his comments:

- SK Telecom has been aggressive with its international strategy. I think it recently increased its stake in China Telecom (NYSE:CHA).

- Now that valuation is way down from $25 when the Nextel merger  was announced, it makes total sense.

- Currency is relatively strong now, so looking at an acquisiton in the US is a good move. I think it will happen.

- Private equity firms are wiling to do deals with Korean firms. SK is one of the top 4 firms in South Korea.

- Just remember that South Korea has a very forward thinking/aggressive president in office. He will even help try to broker the deal if he believes it will bring more recognition and growth to the Korean economy.

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